CALGARY — Warren Buffett’s decision to “run away” from investing in a major liquefied natural gas project in Canada highlights the country’s inability to attract patient, long-term institutional investors in its resources sector.
“I think it’s a big concern,” said Laura Lau, senior vice-president and chief investment officer at Brompton Funds in Toronto, of Buffett’s decision to pull out of a multi-billion project in Quebec amid concerns about Canada’s political environment and regulatory challenges.
Last week, Buffett, the legendary chairman of Berkshire Hathaway Inc. and among the richest people in the world, pulled out of a planned $4-billion investment in Energie Saguenay, a project from GNL Quebec, to build a pipeline and liquefied natural gas export project in Saguenay, Que. The company confirmed it had lost a strategic investor as a result of Canada’s recent political struggles.
The cancelled investment came after weeks of rail blockades snarled shipments of grain, oil and other commodities across the country and led to reductions in port traffic on both the west and east coasts.
Buffett may be especially sensitive to railway blockades, as Berkshire Hathaway owns Burlington Northern Santa Fe LLC, or BNSF Railway. Engines emblazoned with the BNSF railway are a common sight in Alberta, where the trains move tank cars carrying oil by rail out of the country.
“We’re having problems all over the country,” said Brompton’s Lau, who added the railways have historically been “the lifeblood of Canada” and rail disruptions have major impact on investor confidence.
As big-name institutional investors refrain from investing in major Canadian infrastructure projects, the cost of capital for those projects will rise, Lau said, adding that she’s worried the impact of Berkshire Hathaway’s decision extends beyond oil and gas into other projects such as power plants.
The blockades sprung up in solidarity with protestors of the Coastal GasLink pipeline project in British Columbia, which is currently under construction and connects the province’s northeastern gas fields with the $40-billion LNG Canada project in Kitimat.
Buffett would be particularly concerned as LNG Canada had signed benefits agreements with all impacted First Nations along the pipeline route and still encountered entrenched opposition from a group of hereditary Wet’suwet’en chiefs opposed to the project, Lau said.
“He’s looking at a similar project, but in Quebec,” Lau said, noting that his decision to pull out of Energie Saguenay “is just one more thing in the pattern” of major institutional investors exiting the Canadian energy sector.
I think its a big concern
Laura Lau, Senior V-P, CIO, Brompton Funds in Toronto
In recent years, such major international companies as Chevron Corp., Woodside Petroleum Ltd., Exxon Mobil Corp., CNOOC Ltd. and Petronas Bhd. have delayed or cancelled major LNG projects on Canada’s West Coast, though Petronas would later acquire a smaller stake in Shell’s LNG Canada project. Last month, Teck Resources Ltd. pulled its application to build the $20.5 billion Frontier oilsands mine, citing lack of clarity from policymakers on resource development.
As concerns about building major projects in Canada mount, Lau said, the “market’s on sale,” but investors feel there are better opportunities to make money without the same level of risk elsewhere.
Buffett is considered the world’s foremost value investor, and his exit suggests even long-term investors are concerned about Canada’s regulatory environment.
“Value investors are long-term fundamental investors, and when governments do not care about the long-run economics and fundamentals are impacted by politics, they run away,” said George Athanassakos, Ivey Business School finance professor and Ben Graham Chair in Value Investing at Western University.
“When a democratically elected government ends up following policies driven by activists, it is neglecting its larger mission and mandate and that will eventually hurt the economy and fundamentals,” Athanassakos said. “That is why Mr. Buffett, I think, ran away.”
When a democratically elected government follows policies driven by activists, it neglects its larger mandate and that will hurt the economy
George Athanassakos, finance professor, Ivey Business School
Global stock indices plunged Monday as OPEC kingpin Saudi Arabia kicked off an oil price war with Russia over the weekend after Moscow refused to co-operate on oil output cuts.
Some stocks — especially in the energy sector — tumbled as much as 50 per cent on Monday, and the entire market fell sharply.
Berkshire Hathaway was not spared from the market crash, as the company owns a sizable position in Calgary-based oilsands major Suncor Energy Inc., which fell almost 18 per cent to close at $27.56 on the Toronto Stock Exchange.
The company has also been actively buying up distressed assets in Canada and the U.S. during previous market crashes or, on occasion, when companies experience financial difficulty.
In 2017, Buffett stepped in to help heavily shorted alternative mortgage provider Home Capital Group, which was on the verge of collapse amid an investigation by the Ontario Securities Commission.
Shareholders voted down his offer to take a bigger stake in the company and Buffett subsequently sold the bulk of that investment in late 2018. In a statement at the time, he said Berkshire Hathaway would “substantially exit” the investment, but would continue to “cheer from the sidelines” for the Canadian mortgage lender.
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With files from Barbara Shecter