July 12, 2017
(Bloomberg) Add costlier debt and thinner profit margins to the list of woes for Canada’s oil patch.
The Bank of Canada’s decision to increase its benchmark interest rate by a quarter point to 0.75 percent will raise borrowing costs for oil producers already grappling with prices stuck near $45 a barrel. The rate hike also sent the Canadian dollar to a one-year high, threatening to hurt profitability for an industry that sells its products in U.S. dollars and pays its expenses in the local currency.
“This couldn’t come at a worse time for Canadian oil producers,” said Martin Pelletier, a portfolio manager at TriVest Wealth Counsel in Calgary. “With oil at $45, raising the cost of debt is not favorable.”
Ironically, it was the fledgling economic recovery in Alberta, Canada’s main oil-producing province, that gave Bank of Canada Governor Stephen Poloz the confidence to proceed with the country’s first rate hike in seven years. And while producers have somewhat recovered from last year’s lows, their earnings and stock prices are still under pressure.
Aside from crimping profitability, the increase threatens to curtail new projects, said Laura Lau, who manages C$1.3 billion ($1.02 billion) as senior vice president and senior portfolio manager at Brompton Corp. in Toronto.
“It certainly makes them question how much capital they’re going to spend,” Lau said. “Because if cash flow gets squeezed, they have to think about whether they’re going to drill that extra well or not.”