Most Canadian industries benefit from a weaker loonie, says Moody’s Investors Service in a new report.
The rating agency says that a depreciating Canadian dollar is generally credit positive for Canadian companies, and it points to the exploration and production (E&P) and certain segments of the forest product sector as the biggest beneficiaries of the Canadian dollar’s decline to 90 cents U.S.
The depreciation is also credit positive for metals and mining companies and credit neutral for natural gas and oil pipelines, it says. However, the currency’s move is credit negative for some transportation companies, including Air Canada, whose revenues are denominated in Canadian dollars, but which buys fuel priced in U.S. dollars.
“Part of assessing the impact on a company is reviewing exposures to U.S.-dollar denominated costs, debt and equipment purchases, all of which increase with the depreciation of the Canadian dollar,” notes Bill Wolfe, senior vice president at Moody’s. Conversely, a depreciating Canadian dollar positively affects cash flow when sales are U.S. dollar denominated and costs are incurred in Canadian dollars, he notes.
Moody’s says that the Canadian E&P companies “benefit from the fact that they sell oil and gas at prices highly correlated to the US$ prices, while many of their expenses are denominated in Canadian dollars.” However, most of the E&P companies have debt denominated in U.S. dollars, which boosts balance sheet debt as the Canadian dollar depreciates, it notes.
Within the forestry sector, Canadian market pulp and wood product companies benefit most from U.S. sales. “The weaker Canadian dollar moves Canadian producers to the low end of the global production cost-curve, enabling them to better compete with pulp manufacturers in Europe, Latin America and the US,” says Moody’s.
A falling Canadian dollar also increases revenue for Canadian lumber, plywood and oriented strand board producers, with even the price of wood products sold in Canada implicitly tied to the U.S. dollar, it says.
The depreciation is also positive for Canadian miners, since they sell commodities priced in U.S. dollars; although the benefit is partially offset by their exposure to U.S.-dollar priced fuel, U.S. dollar denominated debt, and higher input costs for items that are imported.
The depreciation is credit neutral for Canada’s leading oil and natural gas pipeline operators, Moody’s says, “because it has a minimal impact on the overall ratio of funds from operations to debt, a key credit metric for them.”