By Tegan Valentine
Let’s start with some breaking news out of Vienna, Austria. On Friday, the Organization of Petroleum Exporting Countries (OPEC) concluded its annual meeting and announced a deal that will see oil production increase by 1 million barrels per day. OPEC is an intergovernmental organization of 14 of the world’s largest oil producing nations (Iran, Saudi Arabia, Venezuela and Qatar to name a few). Founded in 1960, the group controls an estimated 73% of proven oil reserves and plays a major factor in influencing global oil prices. The group has been controversial since the start, with many pointing to OPEC as a textbook example of a cartel. OPEC’s announcement will have a significant impact on oil producers – and will likely hit close to home. The Canadian oil industry has struggled recently, plagued by a combination of restricted distribution channels (hello Trans Mountain Expansion controversy) and low prices. Canada’s heavy oil is notoriously costly to produce, making the market sensitive to fluctuations in oil price. While OPEC’s Friday announcement was met by an uptick in oil prices, that trend is unlikely to last. As the market sees an increase in global oil supply, prices will drop, leaving many to wonder – how will Canada’s already struggling oil industry handle this most recent blow?
Keeping the conversation on energy – this week two major Alberta oil and natural gas companies entered into a merger agreement. On Monday Baytex Energy Corp. and Raging River Exploration Inc. announced that they have signed a $2.8-billion merger agreement. The newly-formed company (which will operate under the Baytex brand) will hold a significant stake in Alberta’s East Duvernay Shale region. Shale formations have dominated energy conversations over the past few years – and for good reason. Until recently, energy companies were unsure how they could successfully extract oil and natural gas from North America’s shale reservoirs. The thin fine-grained shale traps hydrocarbons, making conventional extraction methods useless. So what changed? The market discovered fracking, a method of resource extraction that made shale production financially feasible. To date the majority of shale activity has been in the U.S., with increases in energy production south of the boarding hammering Canada’s energy sector. This week’s merger marks an attempt by two mid-sized energy players to gain market power, and capitalize on economies of scale to become more competitive moving forward.
Another merger made headlines this week and this time, there’s a bidding war. On Wednesday, The Walt Disney Company announced an offer of over $71-billion for Twenty-First Century Fox. Disney’s announcement follows a bid placed by Comcast last week, who offered nearly $66-billion for Fox’s entertainment business. According to analysts Disney’s bid was not a surprise, the company has been sniffing around Fox since November 2017, and submitted an initial offer of $52.4-billion back in December. A potential Disney-Fox merger is merely the latest entertainment industry consolidation (AT&T bought Time Warner for $81-billion earlier this month). Why the consolidation trend? Conventional entertainment and telecommunications firms have been struggling lately, forced to compete with tech giants like Amazon and Netflix for viewers. In a world where most spurn costly cable and online ‘binge-watching’ is the norm, the entertainment giants of the past are forced to reevaluate their business models. The outcome of the Fox bidding war remains to be seen, but both Disney’s Bob Iger and Fox’s Rupert Murdoch seem optimistic – expressing their beliefs that a merged company would create “one of the greatest, most innovative companies in the world”.
This week the Canadian Securities Administrators released their long-awaited investor protection initiatives – and many are underwhelmed. On Thursday the CSA released two notices – the first set out reforms to the obligations of registered firms and individuals, while the other outlined possible policy changes with respect to mutual fund embedded commissions. While some of the updates included in the reforms represent a step forward for Canadian markets (the elimination of deferred sales charges for example), many notable exclusions have commentators concerned. The CSA did not move forward with a statutory best interest duty, which would require investment advisors to act honestly and in good faith when providing advice to clients. Further, embedded commissions will continue, preventing investors from understanding the true payout their advisors are receiving as a result of their investments. The limited investor protection reforms set out in the CSA’s notice are disappointing.
A Calgary judge has spoken and it looks like Nova Chemicals Corporation is going to need to pay up – a lot. On Thursday Alberta Court of Queen’s Bench Justice Barbara Romaine released her decision and awarded Dow Chemical Canada US$1.06-billion in damages in a dispute over a massive ethylene plant. The dispute centered around a joint venture, entered into by Dow and Nova, back in 1997. Under the terms of the joint venture agreement the two parties built a massive ethylene plant, with Nova overseeing operations at the plant starting in 2000. In their statement of allegations Dow alleged that, up until 2012, Nova acted in violation of the JV agreement by taking ethylene and other products belonging to Dow, and failing to run the facility at full production capacity. While Nova argued the dispute was merely the result of contract misinterpretation, the Court ultimately ruled in Dow’s favour – stating that Nova’s conduct constituted Wilful Misconduct and Gross Negligence. For what its worth Nova intends to appeal the decision, but that hasn’t stopped Dow from speaking out – on Thursday the company released a statement indicating that it was grateful to receive a favourable judgement that “reflects the multiple years of lost productivity and sales resulting from unmet contractual obligations”.