Royalty Review – Take Two
So was I ever off the mark! Honest Ed Stelmach came out with both guns blazing as far as his aggressiveness with the changes to Royalties. I had anticipated a meeting somewhere in the middle as many of the other people I talked to also thought. Now that the announcement has had some time to settle, what are the repercussions?
The key factors I see are the graduated increases in the Royalty amounts and the timing. By using a sliding scale as oil prices increase the royalty rate increases, so as the oil companies make more money they have to pay more to the government. None of this will take effect until January of 2009, giving the companies a year to figure out how it will influence their business.
This sliding scale will change newer projects more than older projects, but it will cut into profitability on older projects. The newer projects are facing much higher start up costs these days, so it will take longer for them to recoup these costs, especially with higher royalties. The older projects were profitable once oil was above $30-45 a barrel (depending on the project), so they were quite ecstatic with the money they were making. Now although they will still be making money, it will bite into record profits.
The start of the new program being delayed until January 2009 is providing plenty of time for companies to review their costs and whether pending projects will be feasible. Some of this review will also depend on assumptions of where oil prices will be in 2009, which can appear to be a guessing game right now. With current world wide demand still surging this could still work out well for many projects.
Currently several of the large companies are already stating that projects are being put on hold (note they are not saying cancelled!), and many smaller companies are cancelling projects that were borderline before the announcement. The big fallout of this is several jobs may be lost as projects get shelved, which may come as a relief to the Alberta job market. On the positive side this allows the economic boom to extend even longer as projects get temporarily put on hold.
The oil and gas stocks took a momentary dip after the announcements of $1.4 billion in increased Royalties, but nowhere near what any of the analysts projected would occur. Reading into past articles this may have been due to larger investors expecting the worst and exiting early, although not to the level anticipated. Another interpretation is that the energy companies are sitting in such a robust market with such a healthy future that this may change some strategies, but they will continue to be profitable for years to come.
The next few months will probably see all kinds of newspaper headlines talking about how horribly this is affecting the Alberta economy, then how the government didn’t do enough and then back to how the oil companies are going to suffer. The real effect probably won’t show up mid 2008 and everyone has had a chance to see what the outcome will be.
If you have any thoughts on the Royalty Review I would love to hear them! No one has figured out how to add comments on this forum yet, so try and be the first.
Buy Low Sell High
Fear can be such a powerful motivator to people yet too often it’s for the wrong reasons. A great example of this is the title of this article.
Buy low, sell high. It’s a very simple, well known, self explanatory statement and is an uncomplicated formula for creating wealth. Yet people get caught up in the fear and greed cycle of the stock market, or the Real Estate markets or many other cyclical markets out there and fall prey to fear.
It sounds easy to purchase stocks or property at low prices, and then sell them for higher prices, but without a crystal ball or other precognitive abilities, the masses instead follow each other. This is most commonly seen with huge run ups in stocks. Popular stocks can have a high value, when they increase a frenzy may start so people purchase more and expect to ride the wave up even higher.
Isn’t this the exact opposite of buy low? It’s more like buy high and hope to sell higher, but the excitement and greed factors to often kick in. Granted there can be extra room for stocks to continue to grow, Google breaking $700 a share is an example, but typically, when they are on the meteoric rise it seems strange to see all the people buying at the top when the idea is to sell at the top.
Some of this also relates to fear. People are afraid they are missing out on an opportunity and buy in because of a fear of losing while everyone else is winning. In the end, the people who actually know what is happening and bought low have been following “the rule” and selling high, pocketing some nice profits.
In the Real Estate world the last couple of years, anything you bought was low. This allowed almost everyone who dabbled in Real Estate to make money. Now that we have had a short term reversal of the market, it is separating the players from the dabblers by creating fear and uncertainty in the marketplace.
We have already felt the pain of the reversal on one flip property we bought. What was a great deal when we negotiated it in March with a nice four month closing has turned into a property we will be lucky to break even on. We bought low and the market nicely lowered itself to our great price. On the other hand, we recognize it has become an even better time to buy, so we have recently sold a couple properties to pool those profits to purchase more to add to our portfolio.
While homeowners sell at a low price due to fear, we are able to buy low and then by hanging onto the properties for three to five years as rental properties we will be able to sell at a high price. The difference for us is we don’t follow the greed and fear model, but rather look at the long term fundamentals. These include all the economic data on Alberta’s future, the worldwide demand for oil and gas and Alberta’s abundance of these resources and the affect of these over time.
We are not on a get rich quick trip, we are slowly and surely building up equity and value in properties over an extended period. We understand it is a longer journey, but we are enjoying the ride and all of it is based on the simple premise of “Buy Low, Sell High”.
In Closing
We are not quite out of the woods yet as far as the massive amount of listings still out there, but I have talked to several sources who tell me lots of listings are expiring. This bodes well for the spring and anyone hoping to sell at that time. On the positive side, the number of sales is still consistent with last years numbers, reinforcing to us the market is still good.
In the last couple of weeks, I have seen several properties where people have absolutely no clue as to what is going on. It seems like they are pricing the homes as if the market was still going straight up and hadn’t flattened over the last three months. The Realtors out there have to do a better job of advising their clients if they are hoping to help them sell it.
For those of you who are currently selling properties in Calgary or Edmonton, if they are priced right, they will sell. If you are hoping to achieve the spectacular increases of the last couple years again this year, give your head a shake and watch your listing price. Just because Joe down the street has listed his property at $449,000 and it is smaller than yours with nothing renovated, doesn’t mean your property is worth more than that. He may have simply over priced his property by $45,000. With yours priced at $447,000 you may just sell it in a couple days and moving forward while Joe’s property faces several hefty price reductions over the next three or four months.
We have had some great weather so far this fall, we just need a bit more cold weather to help increase the cost of natural gas a bit and help energize the energy companies a bit more. If you ever have any questions, Real estate related or about my articles please feel free to contact me. See you again in December!
Bill and Karen Biko
KatSid Housez Inc.
