Wall Street to Alberta: Don't be ‘so stupid'

http://www.reportonbusiness.com/servlet/story/RTGAM.20071005.r-royalty05/BNStory/robNews/home

SHAWN MCCARTHY

From Friday's Globe and Mail

October 5, 2007 at 12:14 AM EDT

After years of carefully cultivating an image as an investors' paradise, the Alberta government is getting a rough ride on Wall Street over proposed royalty changes that would significantly reduce profits for oil companies that invest in the province.

Accustomed to dealing with political risk in places like Russia and Venezuela, investors and analysts are stunned that Alberta – which has sold itself as Texas North – has apparently taken such an aggressive approach to the industry that has spawned so much wealth there.

“The Alberta government is doing a classic ‘shoot yourself in the foot' strategy,” said Fadel Gheit, an influential New York-based analyst with Oppenheimer & Co.

“It's tried and true: If you really want to hurt your economy, start raising taxes on industries that are really basic to the lifeblood of your economy … It's so stupid – I thought these people were more sophisticated than that.”

Mr. Gheit said energy investors will be wary about Alberta, at least until there is some reassurance that the province is not looking to drive down expected returns on investment through higher taxes.

“They should attract investors, not repel investors. They should put out the welcome mat to bring more money into the province, and market themselves as the friendly, open-for-business place.”

That's exactly the message the provincial government has tried to convey over the years, as former premier Ralph Klein and a parade of ministers visited the North American financial capital to prospect for investment in the oil sands.

Two years ago, Mr. Klein and representatives from several Alberta-based companies brought horses and riders from the Calgary Stampede to perform in front of the New York Stock Exchange.

Mr. Klein met with The Wall Street Journal and BusinessWeek and Forbes magazines to tout the potential of the oil sands and the welcoming investment climate in Alberta. He also participated in a conference call with clients and investors at JPMorgan investment bank in which he promoted the “very attractive investment opportunity” that existed in Alberta.

This past May, provincial Finance Minister Lyle Oberg returned to the city to assure analysts and investors that the new government of Premier Ed Stelmach was equally committed to a business-friendly investment climate. “There was never any indication there would be a move like this,” said one American Canada-watcher who was at the lunch.

In an effort to reassure investors, Alberta Energy Minister Mel Knight is scheduled to visit New York and Boston early next month – after the government has responded to the royalty report.

At a Lehman Brothers' energy conference last month, Canadian companies like EnCana Corp., Petro-Canada and Canadian Natural Resources Ltd. presented their rosy prospects to a room full of investors at the Sheraton Hotel in mid-town Manhattan. They gave no indication of the bombshell that would be dropped less than three weeks later.

Several money managers said in interviews that they are re-evaluating their view of Alberta in light of the proposed royalty changes, which comes a year after investors were hammered by the federal government's decision to end tax advantages for income trusts.

“Any time somebody changes the tax regime or the regulatory regime in a meaningful way, it's a negative,” said one fund manager, who spoke on the condition he not be named. “They have pitched themselves as investor friendly, and have sought out investment, and this isn't really the best way to do it.”

The province has yet to decide on a course of action following the review committee's recommendations. And the committee insists the industry will remain highly profitable under the recommended changes, that Alberta is now out of sync with other major jurisdictions on the tax take from its resources sector.