CALGARY - Oilsands stocks rallied yesterday on a US$4.15 jump in crude prices and optimism that Ottawa's surprise corporate tax cut could rescue producers from Alberta's oil and gas royalty increases.
Oilsands companies with long-term oilsands plans will be among the biggest beneficiaries of corporate tax changes proposed by Jim Flaherty, the Federal Finance Minister, on Tuesday, Andrew Potter, oil-and-gas analyst at UBS Securities Canada Inc., said in a research note.
The three most influential movers on the TSX were oilsands companies. EnCana Inc. jumped $2.96 to close at $66.10, Canadian Natural Resources Ltd. rose $3.46 to close at $78.56, and Suncor Energy Inc. was up $3.79 to close at $103.45. Crude prices jumped as high as US$94.74 a barrel, a record price when not adjusting for inflation, on a report showing that inventories in the United States are at a two-year low. Crude for December delivery closed at US$94.53, up US$4.15.
Tuesday's tax-cut announcement also helped the shares of some other highly profitable Canadian companies. With heavyweights Manulife Financial Corp. and Royal Bank of Canada putting in big gains, the S&P/TSX composite index leapt 319.92 points to finish at 14,625.
"Our preliminary analysis shows that if the changes go through, the net present value per barrel of an onstream oilsands project would go up 1%-3% and the net present value of a greenfield project would increase in the 6%-12% range depending on price--a bigger potential impact than the royalty changes," Mr. Potter said.
"If the proposed changes are not at the expense of other tax incentives, we would expect the oilsands-weighted stocks to react positively as the change is more material than the recent change to royalties," he said.
Mr. Flaherty said in his fall update on Tuesday that he would cut the corporate income tax rate deeper than planned, from 22.1% in 2007 to 15% in 2012, at a cost of $14-billion. The rate was previously set to drop to 18.5% by 2012.
The federal move comes less than a week after the Alberta government disregarded an oilpatch outcry and boosted its take of oil and gas revenue.
Under the new regime, effective Jan. 1, 2009, the province will reap $1.4-billion in additional royalties, or a 20% increase, in 2010, assuming oil prices at US$56.44.
"Clearly [the federal tax reduction] is a very good piece of news because it offsets to a certain extent the bad news we heard last week," said Angelo Toselli, energy tax partner at PriceWaterhouseCoopers LLP in Calgary.
Royalties are charged at the gross sales level, while corporate taxes are charged on profits.
Mr. Toselli said the impact of the tax changes will differ from company to company; those that have existing projects that are cash taxable today will benefit the most in the short term, and those in the development stage will benefit later on.
Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said the tax reductions are "encouraging" and "will clearly change the net effect of the royalty changes and other measures."
The oil and gas sector is participating fully in the reductions, he said. Oil and gas companies were excluded from federal corporate tax reductions in the past.
After a big campaign opposing what they saw as unfair treatment, the sector was brought under the new terms, but with a delay.
Oil and gas companies caught up with the same corporate tax rate as the rest of the economy on Jan. 1.
Mr. Alvarez said he does not expect Ottawa to take steps to recover significant losses in federal income tax revenues from the oil and gas sector due to Alberta's royalty increase. Royalties are fully deductible from federal income taxes.
Don Drummond, chief economist at Toronto Dominion Bank, has estimated federal tax revenue could decline $280-million.
