Thread by @YYC_Confluence

Here's how the recent Canadian Supreme Court ruling and$170/t #carbontax mandate likely becomes a de-facto nationalization of the CDN oilpatch, not unlike the much reviled NEP program of the 1980s. #abpoli #cdnpoli #EFT (1/15)
ft.com/content/077ba8…

Now, if a federal politician advocated outright nationalizing an industry, the repercussions for investors, creditors, FX would be dire across the country - think Argentina & YPF and the experience of other Central American socialist regimes. (2/15)

The #carbontax is effectively a back-door mechanism to do just this, letting the federal government pluck the golden goose, without ruffling as many feathers. But first a little history …. (3/15)

In Alberta, the existing TIER program means industrial emitters only pay CTAX when worse than a 'best-in-class emitter'. So utilities pay CTAX on CO2 > a combined cycle gas plant, oilsands only pay for CO2 > a best-in-class SAGD type etc (4/15)

The TIER program was a compromise program which allowed the optics of "doing something" on emissions, and incentivizing reductions, but being realistic that its impossible to be 'emissions free' with current and future tech (5/15)

Now, with the ruling, it allows the feds to impose a national CTAX. In particular, it allows the feds to "impose minimum pricing standards because the threat of climate change is so great that it demands a co-ordinated national approach" (6/15) cbc.ca/news/politics/…

Now, given this supreme court mandate, it's not a stretch to believe that a future federal government, with a majority mandate (election is coming soon!), would simply rule the Alberta TIER program is "not good enough" and override provincial policy on the matter (7/15)

Nevermind that with Alberta facing enormous budget deficits and continual layoffs, that the province itself (either under conservatives or NDP) might use the new law as cover, to do away with TIER, and pluck a few feathers itself to balance the books (8/15)

How does this "nationalize" the industry? I'll use Suncor $SU as an illustrative case. $SU only pays CTAX under TIER on 7% of emissions. It's best-in-class. With TIER, CTAX of $59 MM annually would grow to $333 MM annually (9/15)

At least this is the pitch you'll hear from every broker on the street.

But ...

If $SU emissions were fully subject to CTAX, that becomes a $4.8 billion payment each year (10/15)

With 1.5B shares, consensus cash flow post-Covid is roughly $10-11B, stay-flat capex guidance is ~$4B ($3.8-$4.5 billion 2021 guide) meaning the feds have the ability to extract 70-80% of the free cash flow from $SU should they choose. (11/15)

Today, $SU is a ~$41B market Cap, $20B Net Debt Company. What is the equity worth of a low-growth firm, with $20B of debt and low single-digits free cash flow?

Prettymuch zero - i.e. a de-facto nationalization. (12/15)

Further, this effectively eliminates growth capital into oilsands (a goal of the environmentally-minded federal Liberals). By starving capital from the oilsands, it will eventually drain demand for condensate as a diluent (13/15)

This will also sting the Montney (eventually). If oilsands volumes fall ~700 kbbl/d it will shift condensate into a surplus, and flip the nice "import dynamics" into "export dynamics". Condy goes from $6-12/bbl premium to Belvieu, to a $6-12/bbl (or worse) discount. (14/15)

All the while - this is expected to add $4k per year to the average family of four (courtesy of Scotia).

So bend over and enjoy it Alberta! #abpoli #cdnpoli (15/15)