Is there an upside for investors in Ottawa’s takeover of Trans Mountain?
If the TransMountain pipeline goes from Crown corp to IPO, investors should pay attention
A CN Rail locomotive. iStock
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Consider this set piece: A Liberal government in Ottawa desperate to build a controversial pipeline originating in Alberta. The opposition Conservatives don’t like the proposal because it requires giving Americans financial support. The Liberals, under deadline pressure, force closure of debate and impose their will over parliament. Sound familiar?
It would to anyone who lived through The Great Pipeline Debate of 1956. And to anyone living in Canada under today’s Liberals. A dazzling example of Back to the Future for political wonks.
The TransCanada pipeline of 1956 was intended to carry natural gas eastward across Canada, mainly to Ontario and Quebec. The controversy and resulting fallout led to the defeat of Prime Minister Louis St. Laurent and his government in 1957, and ushered in PC rule under John Diefenbaker.
Today, TCPL is a utility stock popular with mutual funds, widows and orphans. Investors love pipeline stocks because they have stable income and pay solid dividends. It was a smart buy for anyone who got in early, with the shares returning about 1,700 per cent in the past 30 years, more than double the broader stock market’s gains.
As for the current Liberal regime under Trudeau II – determined to push through the Trans Mountain (TMX) pipeline westward from Edmonton to Burnaby at any cost, including acquisition of assets with tax dollars from Texas-based Kinder Morgan – take heed. Hubris and arm twisting are a toxic political combination.
As concerns investors, should they be interested in getting a taste of TMX when the government sells it, as it hopes to in August? The history of assets offered by government as investment opportunities in this country is a parade of the good, the bad and the ugly.
Let’s start with the good: crown corporations that are privatized typically do quite well. The Canadian National Railway (CNR) was controlled by the feds from its inception in 1918 until its privatization in 1995. The country’s biggest railways system, with operations in the U.S., has been a steady earner.
Anyone who piled in when it IPO’d, the same year Alanis Morissette’s album Jagged Little Pill was rocking the charts, did themselves a favour. Like TCPL, CNR is a popular utility stock for widows and orphans. You probably own it in your RRSP if you have an equity mutual or index fund. Since the start of 1996, the shares have returned almost 9,000 per cent, compared to 472 per cent for The TSX, Canada’s main stock index. If you snapped up just 10 shares at the time for the sum of $205, you’d be up more than $18,000 today.
According to an econometric analysis of CNR’s privatization published a decade ago, the exercise was a text book example of how to privatize a crown corp. Shareholders and government profited to the tune of $8 billion and $6.9 billion, respectively, according to a group of academics, including Mark Moore from the faculty of business administration at Simon Fraser University.
Petro-Canada was a crown corp privatized by the feds in 1991 at $13 a share, practically a steal by today’s standards. Its shares were strong performers until it merged with Calgary’s Suncor Energy in 2009 (Suncor and Petro-Canada shareholders received a 60/40 split of the combined company). Taking Suncor’s historical returns back to 1991 as a proxy for long-term gains to original Petro-Can investors, the outperformance for investors (versus the main market index) is an eyepopping 4,689 per cent.
Government bailouts of distressed assets are another story.
The British Columbia Resources Investment Corp. (BCRIC) was a holding company created by free-enterprising Premier William R. Bennett. It bailed out a variety of distressed assets in the resource sector, including logging camps and mines. It issued shares to the public in 1979, around the time Loverboy released Turn Me Loose, to promote investment in the province and stimulate growth.
The company eventually changed its name to Westar Group and expanded with a number of iffy resource and energy plays, including North Sea oil. Its timing could not have been worse and investors saw their hard-earned dollars vanish in a puff of smoke.
More recently, Canadian taxpayers took a $3.5-billion bath on the federal and Ontario lifelines thrown to Chrysler Group and General Motors in 2009 during the financial crisis that was triggered by the real estate collapse in the U.S.
Similarly, Montreal’s Bombardier, addicted to government largesse and bailouts for decades, always finds a way to survive a crisis. Last year Airbus took a 50.01 per cent controlling stake in Bombardier’s C Series aircraft and moved part of the production to Alabama. This after more than $1 billion had been pumped into the company by Quebec and Ottawa to keep the C Series alive. Bombardier has been a volatile performer in the market, and many investors have been burned.
In the fallout of the financial crisis in the U.S., investors were able to play rebounds in stocks of companies who received federal bailouts, such as Citigroup and GM. But in general, these are plays for nimble traders who get in and get out.
GM was the largest manufacturing collapse in American history and needed a trip through bankruptcy protection and a massive investment from the government to pull through. There has been money to be made by investors, but since it emerged from protection GM’s shares have returned on average 5.8 per cent per year (Citigroup has returned 7.1 per cent a year over the same period). And that doesn’t look great against a benchmark average annual return from the S&P 500 index of 14.2 per cent.
So what might all this mean for the the Trans Mountain pipeline, now a crown corp? The Liberals have signaled their intention to sell it sooner rather than later, but it’s unlikely to be privatized like CNR or Petro-Canada before it. So investors shouldn’t hold their breath. The most likely scenario is a bought deal after the pipeline has been completed and political risk has been let out of the tires.
Don’t be surprised if China, who is the ultimate recipient of the oil to be transported by TMX, makes a strong pitch to be the owner. After all, that country’s government would like nothing better than an opportunity to build out its energy infrastructure on Canadian soil. (Ottawa has indicated it’s okay with China owning energy assets; it was the security issues around the military and nuclear power that recently led it to nix the Chinese takeover of Aecon, the construction company.)
Of course, there is one big factor in whether it might be spun out to be an attractive play for investors and that’s the direction in oil prices, which has always been a bit of a crap shoot.