A small increase in interest rates will lead to costlier debt and lower profit margins for Canada’s struggling fossil producers, Bloomberg reported yesterday, after Bank of Canada Governor Stephen Poloz announced the country’s first prime lending rate since 2010, from 0.5 to 0.75%.
The central bank move “also sent the Canadian dollar to a one-year high, threatening to hurt profitability for an industry that sells its products in U.S. dollars and pays its expenses in the local currency,” the news agency noted.
“This couldn’t come at a worse time for Canadian oil producers,” said TriVest Wealth Counsel portfolio manager Martin Pelletier. “With oil at $45, raising the cost of debt is not favourable.”
Brompton Corporation Senior Vice President Laura Lau said the rate hike could have an impact on prospective new projects in Canada’s oilpatch. “It certainly makes them question how much capital they’re going to spend,” she told Bloomberg. “Because if cash flow gets squeezed, they have to think about whether they’re going to drill that extra well or not.”