Canada has been struggling. The nation’s stock market performance, as measured by the iShares MSCI Canada Index (ETF) (NYSEARCA:EWC), has trailed the S&P 500 by 30% over the past two years due to sagging commodity prices.
Canadian oil isn’t reaching the highest bidder.
Canadian Western Select sells for a $35/brl discount to the world benchmark price. Why has this happened? Massive production growth from the Bakken and Eagle Ford formations have overloaded pipeline capacity. For most of the industry’s history, pipeline shipped crude inland from the coast. Today, energy economics have completely reversed and there’s no capacity to access higher prices in premium international markets.
This situation is hurting upstream producers. Earlier this month, Canadian Natural Resource Ltd (USA) (NYSE:CNQ) posted disappointing fourth quarter results. While crude oil output grew 14% YoY, the company’s revenue declined 12% to $3.7 billion. While the company is growing production at double-digit clip, it’s slamming right into a wall of low prices.
Don’t expect this environment to change any time soon. As Fool contributor Matt DiLallo pointed out, there’s lots of new capacity coming online. Imperial Oil Limited (USA) (NYSEAMEX:IMO)‘s Kearl Project is expected to be competed in a few weeks producing 110,000 bpd. Suncor Energy Inc. (USA) (NYSE:SU) is expected to compete the fourth stage of its Firebag project, which will produce an additional 60,000 bpd later this year. With transportation capacity difficult to add, expect the Canadian crude discount to widen.
After the gold rush
Profits in the mining industry are being squeezed due to sagging metal prices and rising expenses. Despite loose monetary policy gold, copper, nickle, silver, and zinc prices are all nearing 52-week lows. Costs are skyrocketing as firms must dig deeper to find new, lower grade deposits.
The company has had a series of setbacks. This quarter, Barrick was forced to write off $3.8 billion of its Lumwara copper mine in Zambia. Last year, the company doubled the cost estimate on its Argentina/Chile Pascua-Lama project, projecting it will now cost as much as $8.5-billion to develop. That’s more than double the $3-billion initially foretasted in 2009.
Barrick is now in the process of shedding unprofitable projects and has no plans to open new mines in the near future. A common theme across the industry.
Last week, StatsCanada announced the Canadian debt-to-income ratio hit a record 165% driven by cheap credit and soaring home prices. This is higher than the peak achieved in America before the financial crisis in 2007 (although there’re a few important differences).
Banks have tapped out the lucrative retail lending market. In order to grow earnings banks must either reduced interest rates, crimping margins, or lower their lending standards, risking higher defaults.
There’s evidence that a price war may be developing. Earlier this month, the Bank of Montreal (USA) (NYSE:BMO) announced it was re-offering its record low 2.99% 5-year fixed mortgage. Last year aggressive price cuts did little to improve Bank of Montreal (USA) (NYSE:BMO)’s market share in the mortgage industry. But it did prompt competitors to respond, significantly hurting net interest margins across the entire space.
Throw in a slowing housing market and you have a recipe for weak growth in the financial sector.
Foolish bottom line
Despite the headwinds, there are some good investment themes emerging from the country. The oil glut is creating a boom for midstream companies like Enbridge Inc (USA) (NYSE:ENB), TransCanada Corporation (USA) (NYSE:TRP) and Canadian National Railway (USA) (NYSE:CNI), firms that move energy product from well to market. There’re also lots of great growth stories like Catamaran Corp (USA) (NASDAQ:CTRX and Valeant Pharmaceuticals Intl Inc (NYSE:VRX).
But with so many headwinds, investors should just avoid investing in Canada as a macro theme.
The article O’ Canada! 3 Reasons to Avoid Investing in the Great White North originally appeared on Fool.com and is written by Robert Baillieul.
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