Oil party hits the skids
Claudia Cattaneo and Carrie Tait
Financial Post
Saturday, November 08, 2008
Gavin Young/Canwest News Service
CALGARY -The other day, John Davis, a money manager to Calgary's uber-
rich, was walking along a downtown street and saw a man pull out of
the parking lot of a gleaming office tower in a splashy Mercedes.
In the side windows of the car were "For Sale" signs. The driver would
settle for 40 grand.
"I just thought, 'Now I have seen everything.' If you own a Mercedes,
it would be kind of embarrassing to post a 'For Sale' sign on your
window," said Mr. Davis, senior vice-president at Corporate Planning
Associates.
It's an indication of how much and how quickly Calgary -- a city
sprinkled with "Beemers" parked on heated driveways -- has changed in
the past few months.
Sure, the whole world is taking it on the chin from the financial
meltdown. But Calgary thought it was invincible, its latest boom being
so big and lasting so long. Downturns have been wiped from the city's
collective memory.
Fancy stores were rushing in. High-end car dealerships such as Aston
Martin opened their doors. Second and third homes were snapped up on
ski hills, the West Coast and Arizona. Houses were bulldozed to make
room for mansions, while new country estates devoured the ranchland
surrounding the city. And Calgarians happily regarded paying high
gasoline prices as part of their civic duty.
That was then.
Mr. Davis can pinpoint the precise day Calgary's cockiness faded: Oct.
10.
The stock market's energy group, where Calgarians hoard their wealth,
had just wrapped up a 25% nose-dive, deepening losses to 60% from the
June 18 high.
"The last time we went through a bear market it was technology
driven," Mr. Davis said. "Calgarians didn't have any skin in that
game. Their energy holdings just kept going up and up and up, and so
[the tech bubble] was something affecting the rest of the world.
Whereas this is affecting us, and it's affecting us more severely than
the broader market."
In the past month, some $30-billion in oil sands plans has been put on
ice. Conventional oil and gas projects will be funded next year only
if there's enough cash to support them. Companies that had been
tossing around billions of dollars without blinking have turned frugal.
With oil prices nearly 60% lower than they were in July, the city is
bracing for a downturn that could stretch one to two years.
According to Richard Corriveau, regional economist for Canada Mortgage
and Housing Corp., Alberta's growth rate is set to shrink to a paltry
1.9% next year, and it could drop further depending on what happens to
the oil sands.
That's a seismic shift from the 6.5% growth experienced in 2006 -- so
high Alberta was likened to China. The province's output grew 3.3% in
2007.
While certainly slowing, Mr. Corriveau said Alberta will still outpace
the rest of the country.
Yet, the belt-tightening is affecting all corners of the city.
Charities have accepted that the easy money that used to come their
way will be tougher to find.
Ruth Ramsen-Wood, president of the United Way of Calgary and Area,
said her organization set its 2008 fundraising goal at $52-million, up
just 3% from its 2007 target. But getting to this goal is going to be
a slog.
Some major individual donors -- those who chip in around $25,000 to
$30,000 and whose wealth is closely tied to the stock market -- are
stalling.
"They are just saying, 'I don't know yet,' " said Ms. Ramsden-Wood.
"We won't be cruising in over [our] goal this year," she said.
Mr. Davis, the money manager, said many of the executives he looks
after are putting on hold plans for charitable foundations.
The city's Bentley and Aston Martin dealerships, which live off
Calgary's oil money, started to feel the effects of the slowdown about
six or seven weeks ago.
"We've already seen a little bit of a slowdown," said Andrew Baker,
who has been selling top-of-the-line vehicles such as Bentleys and
Porsches for 17 years. "I have to admit, it has been a little bit
challenging the last few weeks."
The last time Mr. Baker saw a similar stall in sales was in 1991-92,
when the stock market crashed in the United Kingdom, where he was
working for Porsche. "I'd like to think what we're going through is
temporary," he said.
High-end restaurants that were feasting on customers with fast cash
and fancy tastes are seeing volatility.
"As soon as the first real wave of [market] craziness came in, a month
back or so, we did about a week of service where we noticed a little
bit of drop," said Devin Morrison, general manager of Teatro
Restaurant, where an average meal for four people rings in around
$400, but it isn't unusual to see big spenders drop $900 in a sitting.
"But aside from that, really nothing crazy."
Though Teatro escaped October's mess, Mr. Morrison said his colleagues
in the hospitality industry are talking about the consequences of the
slowdown.
Some of the biggest declines have been in residential real estate
values that were once cause for bragging. The Calgary Real Estate
Board this week said October condo sales were down 20.36% from last
year, while single-family home sales dropped by 26.33%. The average
condo sold for $289,148, a drop of 12.81%, while the average single-
family home was down 0.7% to $449,100.
Meanwhile, Calgary's office market, where the vacancy rate two years
ago was nonexistent, is loosening up dramatically.
With five office towers launched during the heyday and soon scheduled
for completion, the vacancy rate could soar between 11-12% in the next
three to four years, said Randy Fennessey, president of Colliers
International's Calgary office.
"It's too early to hit the panic button on the Calgary market," he
said. However, "we will certainly be negatively impacted by the events
unfolding in the world economy."
Mr. Fennessey sees more space coming up as distressed companies merge,
but that will be tempered by the continuing influx of oil
multinationals moving into the oil sands.
"Companies like [Parisbased] Total that were renting 9,000 square feet
a few years ago, their growth curve has been tremendous," he said.
"Now they are leasing 100,000 square feet and change. And they are
continuing to grow. Others out there are similar."
While there has been buzz about layoffs, they haven't yet
materialized. Headhunter Mark Hopkins, a partner at Conroy Ross
Partners Ltd., said he hasn't seen a slowdown in oil and gas
recruiting yet, but demand for talent is shifting.
Smaller companies and start-ups that used to be big hirers are scaling
back, while bigger companies with solid financial positions are still
moving ahead.
As companies complete their budgets for 2009, it is likely there will
be more emphasis on filling essential positions, and less on growth
positions, Mr. Hopkins said.
Mr. Davis said he watched the wealth of his clientele explode during
the oil bull market of the past decade. Among his clients, the average
net worth rose to $25-million to $30-million, from $5-million. Indeed,
many were planning their retirement parties.
Now purchases like private planes and vacation properties have been
put on hold.
The crash is forcing them to rethink all their plans, he said.
"They are feeling poorer."
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OIL SANDS PULLBACK
Among those pulling back on spending are:
Suncor Energy Inc. is holding off on its Voyageur expansion plans. It
has cut about $4-billion from its 2009 spending budget.
Value Creation Inc. delayed construction on an upgrader. It had a $4-
billion price tag.
Nexen Inc. and partner OPTI Canada Inc. have indicated expansion plans
at their Long Lake project will be delayed.
Statoil ASA and Total SA are holding off on upgraders. Petro-Canada is
considering pushing back an upgrader at its Fort Hills project. That
would provide it a savings of $10-billion.
Royal Dutch Shell PLC delayed any further expansion of its Athabasca
project. The next expansion would have cost around $12-billion.
Companies such as Canadian Natural Resources Ltd., Talisman Energy
Inc. and EnCana Corp. are cutting spending on conventional oil and gas
projects, but budgets have not been finalized.
