The intense heat experienced through the early spring has sparked a number of devastating wildfires in Alberta. While natural disasters can have a profound impact on the emotional and psychological well-being of those affected, the disruption to daily life and the uncertainty about the future can also be overwhelming.
Additionally, the economic impact of natural disasters is another important aspect to consider. In addition to the direct costs of damages and losses, there are also indirect costs that can be felt throughout the affected region and even the broader economy. For example, businesses may be forced to shut down, supply chains may be disrupted, and tourism may decline. The rebuilding process can also be expensive, requiring significant resources and funding.
Alberta is home to a number of publicly traded companies that operate close to areas affected by the wildfires, and in this article, we explain the financial impact, discuss the preventative measures taken by companies, and share what all of that means when it comes to investment portfolio.
Hectares burned in Alberta wildfires each year (2015-2023)
Companies are generally prepared for emergencies
While Alberta has a variety of successful industries, many investors immediately think of the province’s natural resources and the number of oil and gas companies operating in Alberta. With the majority of the fires located in northwestern Alberta, the fires are impacting many publicly traded deep basin operators. A number of companies have taken steps to temporarily suspend production from affected wells and evacuate staff until the affected areas are safe. Additionally, some pipeline operators in impacted areas have stopped transporting fuel while they assess risks posed by the wildfires. While recognizing the profound impact to those who live and work in the affected areas of the province directly, there are also economic considerations for investors.
If a company is directly impacted and has ceased operations in affected areas, the associated revenue from selling production will also be impacted. To reduce the impact of this lost revenue, many companies purchase business interruption insurance to help lessen the burden while operations are suspended by the wildfires. Another scenario is the potential for damaged equipment or infrastructure. In this case, commercial property insurance can help cover the cost of replacing or repairing damages. In both cases it is important to recognize that oil production that is shut-in due to wildfires, still remains underground in its reservoir until such time as it is safe to produce. As such, most natural resource production is not lost but simply deferred until it can be safely produced. As reflected in the chart below, the TSX energy index is more influenced by the price of oil rather than temporary production disruptions.
Energy index more influenced by oil prices
Short-term events shouldn’t interrupt long-term plans
While natural disasters can be difficult to predict or be completely prepared for, having a diverse portfolio can help mitigate the impact of unexpected events. If your investment portfolio is concentrated in a specific geographic area or sector, this can sometimes lead to undesirable results. Wildfires, earthquakes, hurricanes and even other unexpected events such as war can expose companies to unexpected and unwanted adversity leading to potentially significant economic and human consequences.
Uncertainty and volatility will continue to remain a constant with our investments and instead of focusing on shorter-term events, having a plan will keep you more focused on long-term results. Markets have shown remarkable resilience and generally bounce back from shorter-term events to reward patient long-term investors.
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