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Increasing Market Liquidity in

Exigent Times: Preamble to Possible


Intervention in Energy Cycle

Q4 2014 was a terrible time for most of Albertas oil patch, culminating in
several big net loss quarters and deteriorating balance sheet and cash
outflows for many companies. Moving onto the end of the abysmal Q1 2015,
we have seen 6 months of depressed oil commodity prices, with expectations
of recovery on sight for 2018 to 2020. Now this sorry state of affairs has
reared its ugly head many a times in Alberta, yet we must act like sitting
ducks gingerly waiting for Armageddon. Surely, there must be a better way
for Alberta!
To our great relief, the Albertan oil patch has not seen a slew of
delinquencies previously predicted by many prominent newspaper outlets,
especially business magazines. There have been a couple of small defaults;
These companies were small producers in capital transitory state who got
caught in the protracted energy cycle and did not have proper contingency
plans in place for a temporary severe stress on their balance sheets. Aside
from a select few, companies have remained a Going Concern, albeit some
have relayed or will relay stresses to their Going Concern position in their
Annual Reports.
What we are seeing today in the industry is a culmination of several factors
that have hit the industry hard. But lest I digress, I will save it for another
time and focus on the task at hand. The Provincial Governments

Macroeconomic approach to the industry has been simply


lackadaisical. This is very worrying, especially in light of the Macro nature
of the energy industry, especially Oilsands, and the threats it faces for its
global energy market share. Letting the market cost and allocate risk and
resources to different capital intensive projects is the right strategy.
Government rightly should have limited domain here. Markets are the better
determiners for malinvestment, since they have the proper technical
knowhow and the overriding urge to fully enjoy the fruits of capital.
Nevertheless, in exigent commodity prices times, market act in a Herd
mentality and capital placement goes awry. This is both for good and bad
times. It is very hard for Markets in a panicked state, to discern between
good companies and bad apples. I dont want to personally list the
companies, but just check TSX tickers and compare key ratios.
So the question then becomes, is it in the public interest to increase liquidity
in the acquisition marketplace and set an artificial price floor for net assets?
Is this something the government can afford or will want to? If Albertas
history is any indication, such a cry can be raised, albeit, very reluctantly.
Whoever remembers Premier Don Gettys 1980s era remembers the string of
corporate bailouts given to various industries to help them stay afloat. I am
not suggesting such a strategy, in part because it was accused of having a
nepotistic element, and in part because of the malinvestment risk the
government had to bear. So then what should governments do? Remember,
we got lucky here in Alberta because the Canadian economy was and is
much more heavily weighted in oil. This allowed us to stave off ballooning
debt servicing, a headwind US energy companies may face later this year.
The answer to our problems may partly lie in setting up an Energy
Purchase Clearinghouse Vehicle Corporation! The name is so simple (I
am just kidding). My concern here is that a protracted energy cycle leads to
excessive malinvestment, or really artificially deflated prices that lead to
severe job losses, errant consolidation of the industry, and ultimately, loss of
exchequer money to the government through a variety of ways. Right now,
we have not seen the Bloodletting that may happen (I hope not).
Therefore, it is imperative that government have a Backup Plan B, or really a
Plan A in a period of depressed prices. In my next article, I will explain how
we can stem the tide with this Vehicle!

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