Could Oil Prices Turn the Flames Into A Budget Team?

Ryan Pike
January 09 2016 12:00PM

Hockey and the business world have been intertwined for basically as long as both have existed. And ever since Canada's biggest movers and shakers of various industries have become involved in the ownership groups of the Canadian National Hockey League teams, its meant that the business of business is almost as important as the business of hockey.

In a lot of ways, the introduction of the salary cap has diminished the amount that exchange rates and commodity prices can impact any individual club's operations, but for a few reasons, you might want to keep an eye on the recovery of oil prices (and the Canada/U.S. exchange rate) over the next six-to-nine months.

A BRIEF HISTORY

Since the team arrived in Calgary, the Flames have been tied to the oil industry in two primary ways. First and foremost, the team's ownership group (while varied) has featured some of the biggest players in the Canadian energy sector - nowadays it's Murray Edwards, but the Seaman brothers and others have been huge movers and shakers both in the oil-patch and the NHL.

Second, Calgary is an oil town and the Flames get a gigantic chunk of their revenue either directly from energy companies purchasing suites or advertising, or indirectly via season-ticket and other purchases for individuals that work for the energy companies.

The 1990s collapse of the Calgary Flames was precipitated by a downturn in the price of oil worldwide, the downturn of the Canadian dollar, and the lack of a salary cap meant that the American teams could easily out-spend Calgary. All the Canadian teams felt the pressure of paying players in American dollars while taking in revenues in Canadian dollars - Quebec and Winnipeg had to move because of economic pressures - but arguably no team felt the challenges on both sides of the ledger as the Flames did, leading to the eventual "save the Flames" season ticket drive that ended up keeping the team in town. (The Oilers were probably a close second.)

SO WHAT?

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The world oil price has dropped from about $60 in June to just shy of $33 now (in terms of West Texas Intermediate). Similarly, the exchange rate has moved from $1.25 Canadian per American dollar in June to around $1.41 now, which placed the "real" cost of the $71.4 million US salary cap at $89.25 million (in June) and $100.7 million now. (An aside: holy crap.)

The Flames get their revenues through the disposable income of Calgarians, and through the promotional and marketing budgets of various Calgary-area companies. The Calgarians most likely to come to Flames games - to be able to afford ticket prices, parking costs, and buy beer, nachos and jerseys - are probably higher-income Calgarians, which typically means you work in the energy sector or in a connected industry. Similarly, energy companies have traditionally bought a ton of advertising, corporate seats and rented suites from the Flames, in part because they have the financial ability to do so (both as a marketing tool for themselves and as a means of treating their employees).

Now, here's the rub: season tickets are generally on year-to-year contracts, and corporate commitments typically vary in length. But for argument's sake, let's just suppose that a decent chunk of them are either also year-to-year, or have "buy-out" provisions that allow a company to get out of a multi-year deal early by paying a penalty. Last spring, when season ticket renewals were up, the Flames were doing well but more importantly the economy was doing fairly fine - oil prices were sliding a bit, but the bottom didn't fall out of the market until the summer. But if you're an oil company facing the prospect of low prices and future production and/or workforce rollbacks, or if you're a worker who has been laid off (or is worried about the prospect of it), you probably won't want to commit a lot of money to season tickets no matter how good the team is on the ice. And a lot of ticket holders bailing out at the same time could possibly make a noticeable dent in their bottom line.

A MATTER OF TIMING

Most economists are now saying that the price of oil probably won't start recovering until the second half of 2016, which means the spring ticket renewal will probably come at a time when nobody's really sure when the Alberta (or Canadian) economy is going to really rebound. And the NHL will have to set its 2016-17 salary cap in the first chunk of 2016, likely with the Canadian owners trying to keep it as low as possible to avoid exposing themselves to exchange rate risks and a competitive disadvantage with the American teams.

I figure the salary cap won't move very much for next season because of the weakness of the Canadian dollar - and importance of the health of the Canadian markets to the NHL's bottom line - but I also wouldn't be surprised if a few of the smaller market Canadian teams (Calgary, Edmonton and Winnipeg specifically) don't become budget teams to some extent as their markets weather the economic storm. If the energy sector keeps taking a kicking and a recovery in oil prices looks a long way off, and if Flames ownership are worried about the long-term viability of the franchise if they keep spending to the cap, you might end up seeing the local hockey club quietly become begin to run on a budget.

And don't even get me started on the likelihood of Flames ownership fronting a bunch of money for a new arena while oil prices are this low, because I really can't see that happening.

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Ryan Pike has covered the Calgary Flames since 2010. He's Senior Contributing Editor at FlamesNation, a Senior Writer covering the Flames and the NHL Draft for The Hockey Writers, and a correspondent for the Fischler Report. You can see his hand or the side of his head on TV sometimes.
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#1 RealMcHockeyReturns
January 09 2016, 12:10PM
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Sadly, even the uber-wealthy Flames owners could cut back on salary spending for good players during lower-than-usual revenue/income years from their oil companies....especially if season ticket sales, food and liquor sales at games (#1 revenue source on this entire list), in-arena advertising revenues, and TV and radio rights revenues decrease. Let's hope the team's on ice-success is more vital to owners than a temporary decrease in these amounts!!

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#2 Sexxxfan69
January 09 2016, 12:17PM
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F-ing NDP

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#3 FeyWest
January 09 2016, 12:24PM
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We may see a bit of a hit but I'm not too concerned. I feel the owners living through a similar downturn in the 90's probably were smart to have a "rainy day" fund just incase a similar event were to occur. It's certainly interesting, it sucks but I don't think anyone expected a permanent high oil price/canadian dollar. And really I think we're lucky to have a guy like Tre who knows how to be successful with potential financial constraints.

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#4 coachedpotatoe
January 09 2016, 12:27PM
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Sexxxfan69 wrote:

F-ing NDP

NDP has nothing to do with global oil prices falling. Blame them for the things they do wrong. Blame the Russians for invading the Ukraine, blame the Americans for their over supply, blame the Saudi's for over production, blame the Conservatives both feds and provincial for not diversify the Alberta economy and blame the oil industry for not realizing that the oil industry has a cyclical nature and preparing for it. But this supposed to be a sports blog so I regress.

If the team is competitive it is likely the fans will still attend; they might spend less on beer etc but tickets will still be sold. If the team becomes none competitive then watch out. Also another factor keeping them from becoming a floor team is TV revenue but if this dries up then watch out.

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#5 mattyc
January 09 2016, 12:36PM
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#ThanksNotley #ThanksTrudeau #ThanksPike (for politicizing the hockey blog -- what are your best expectations for how this comment section will turn out?)

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#6 Kevin R
January 09 2016, 12:38PM
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They do get pid for their Oil in US $$$ & that gives them like an instant 35% return to help ease the low Oil prices. They are sophisticated enough to know how to make money in any kind of economy, & NHL Revenues they make are from markets that are doing way better than just Alberta, that they get their share of the pie.

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#7 deantheraven
January 09 2016, 01:03PM
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Anyone have an idea what the season ticket numbers are this year? And how much did the team rake in with the extra home games in the playoffs last spring? Methinks we're a long way away from being a floor team.

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#8 coachedpotatoe
January 09 2016, 02:00PM
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To the writers I am wondering if you might be doing a round table soon? Some items I would like to read about is your views of who the Flames should try and acquire, the why and what the costs might be.

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#9 FLT
January 09 2016, 02:18PM
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Is there some reason to think the flames haven't hedged at least some portion of their currency risk?

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#10 cberg
January 09 2016, 02:41PM
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Good article, and pertinent to not only the Flames but also the NHL in general as it is largely propped up by the Canadian teams. I would expect the Salary Cap to stay level if I'm being optimistic, and decrease if not. Its going to be an interesting next year or two.

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#11 Tripped Up
January 09 2016, 03:04PM
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We have to take into account there is now revenue sharing, which wasn't in place back in the mid 90's. It came shortly after Winnipeg and Quebec moved south to help the remaining Canadian franchises.

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#12 MontanaMan
January 09 2016, 03:57PM
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The issue is likely less about the owners and more about the season ticket holders. The official number of job losses in Alberta is 65,000 but the real number is likely close to 100,000. People lack confidence to buy anything big right now including houses, vehicles, etc. Many will take a hard, long look at season tickets if you aren't confident you'll have a job in 2016.

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#13 MontanaMan
January 09 2016, 04:05PM
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Kevin R wrote:

They do get pid for their Oil in US $$$ & that gives them like an instant 35% return to help ease the low Oil prices. They are sophisticated enough to know how to make money in any kind of economy, & NHL Revenues they make are from markets that are doing way better than just Alberta, that they get their share of the pie.

When it's costing between $40 - $70 CDN to produce a barrel of oil, $33 USD doesn't cut it. Most companies are losing money on every barrel and some have started shutting in wells. 2016 does not look good.

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#14 ville de champignons
January 09 2016, 04:11PM
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Answer to the question: Yes. Related: Just noticed that the schedule calendar hasn't been updated for a couple of games... cost-saving in the face of the falling dollar?

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#15 everton fc
January 09 2016, 05:12PM
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This is a very valid discussion. The realities of our times, versus entertainment. No question many Canadian teams will become "budget" teams. This isn't like the "old days", when oil will simply have a lull and bounce back. The geopolitics are different. Technology is different. And so on. With the tensions going on daily in the Middle East, historically prices would be well over $100/bbl. They are going down. Daily.

The building of a new arena also makes little sense, in the current economic crisis, unless the NDP is going to fund it as a job-creation campaign. They won't, though. FDR might have, but not the NDP!

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#16 ville de champignons
January 09 2016, 05:14PM
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Just wondering. If the league reduces the salary cap by x% are all *existing* salaries reduced by the same percentage?

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#17 cberg
January 09 2016, 05:42PM
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ville de champignons wrote:

Just wondering. If the league reduces the salary cap by x% are all *existing* salaries reduced by the same percentage?

Not really sure as I think it is uncharted territory. The last time the Cap went down was during the Collective Bargaining Agreement and yes, I believe there was a salary roll-back. This time I'd expect not, and the teams would just have to adjust. Having said that, I believe the NHL can unilaterally up the Cap 5% per year so the likelihood of it going down, in spite of lower revenues and lower C$ is pretty remote.

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#18 VK63
January 09 2016, 05:44PM
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A thought provoking piece, and a fine diversion from "what the hell was hartley thinking".

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#19 ville de champignons
January 09 2016, 07:43PM
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@cberg

Ok. Thanks.

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#20 NsOilFan
January 09 2016, 09:32PM
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And the Oil strike at the heart of Calgary again ;)

I'm glad the owner in Edmonton is in the pharmaceuticals business.

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#21 Jake the Snail
January 09 2016, 10:48PM
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NsOilFan wrote:

And the Oil strike at the heart of Calgary again ;)

I'm glad the owner in Edmonton is in the pharmaceuticals business.

Drug dealers rule!

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#22 Joh
January 09 2016, 10:51PM
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WTI Crude? More like WTF Crude, amirite? Thanks, Justin and Rachel.

But seriously, these are good things to think about going forward. I doubt ticket sales will dry up too quickly, but a drop in corporate sponshorships and hospitality might hurt the team a lot.

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/calgarys-fine-dining-restaurants-the-latest-victims-of-oil-price-collapse/article27946636/

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#23 Kent Wilson
January 10 2016, 10:45AM
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@mattyc

Ryan states nothing political in his article. He states facts about Calgary's economy and draws parallels to how this have affected the team previously. Anyone inferring political motivations to this article are conjuring them out of thin air.

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#24 Kevin R
January 10 2016, 10:46AM
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MontanaMan wrote:

When it's costing between $40 - $70 CDN to produce a barrel of oil, $33 USD doesn't cut it. Most companies are losing money on every barrel and some have started shutting in wells. 2016 does not look good.

Thats why they leave the Oil in the ground & many people don't work. You think these guys aren't diversified & never learnt from the Boom/Bust days of the NEP in the 80's? They have other interests to feed their big wheel barrel full of money. Also, last I saw, NHL & NHLPA are part of a grand Revenue Sharing. The Flames, just like the Oilers & any other Canadian team get their fair share of the Revenue pie. The US teams are doing quite well. So what if the building isn't sold out every game? Look at the new building going in Edmonton & what has been proposed here in Calgary. These building aren't designed to fit 30-40000 people. They're spending this money to basically house the same attendance capacity as the current buildings do, why do you think that is? Attendance is only a small part of the true Revenue stream.

Things change real quick. Who knows, stuff happens in the world & Oil can be back over $100.00 in no time. & then the waiting list to get Season Tickets goes up from 3000 to 15000 names. So whatever. What do thou suggest? Better trade Monahan & Gaudreau for an unknown player with good stats & cash like Billy Beane did on Moneyball last night eh?

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#25 class1div1
January 10 2016, 12:00PM
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Kevin R wrote:

Thats why they leave the Oil in the ground & many people don't work. You think these guys aren't diversified & never learnt from the Boom/Bust days of the NEP in the 80's? They have other interests to feed their big wheel barrel full of money. Also, last I saw, NHL & NHLPA are part of a grand Revenue Sharing. The Flames, just like the Oilers & any other Canadian team get their fair share of the Revenue pie. The US teams are doing quite well. So what if the building isn't sold out every game? Look at the new building going in Edmonton & what has been proposed here in Calgary. These building aren't designed to fit 30-40000 people. They're spending this money to basically house the same attendance capacity as the current buildings do, why do you think that is? Attendance is only a small part of the true Revenue stream.

Things change real quick. Who knows, stuff happens in the world & Oil can be back over $100.00 in no time. & then the waiting list to get Season Tickets goes up from 3000 to 15000 names. So whatever. What do thou suggest? Better trade Monahan & Gaudreau for an unknown player with good stats & cash like Billy Beane did on Moneyball last night eh?

I always thought the 185000 seat capacity was limited to maximize vision and the ability to see the ice?

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#26 MontanaMan
January 10 2016, 12:06PM
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class1div1 wrote:

I always thought the 185000 seat capacity was limited to maximize vision and the ability to see the ice?

That's one big arena.......or fat fingers.

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#27 kittensandcookies
January 10 2016, 03:49PM
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Kevin R wrote:

Thats why they leave the Oil in the ground & many people don't work. You think these guys aren't diversified & never learnt from the Boom/Bust days of the NEP in the 80's? They have other interests to feed their big wheel barrel full of money. Also, last I saw, NHL & NHLPA are part of a grand Revenue Sharing. The Flames, just like the Oilers & any other Canadian team get their fair share of the Revenue pie. The US teams are doing quite well. So what if the building isn't sold out every game? Look at the new building going in Edmonton & what has been proposed here in Calgary. These building aren't designed to fit 30-40000 people. They're spending this money to basically house the same attendance capacity as the current buildings do, why do you think that is? Attendance is only a small part of the true Revenue stream.

Things change real quick. Who knows, stuff happens in the world & Oil can be back over $100.00 in no time. & then the waiting list to get Season Tickets goes up from 3000 to 15000 names. So whatever. What do thou suggest? Better trade Monahan & Gaudreau for an unknown player with good stats & cash like Billy Beane did on Moneyball last night eh?

Revenue != profit

The NHL is a gate driven league.

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#28 RealMcHockeyReturns
January 10 2016, 06:47PM
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kittensandcookies wrote:

Revenue != profit

The NHL is a gate driven league.

Sorry wrong on both counts

Revenues not the same as profit at all...MAY lead to profits but if still paying high player salaries with lower revenues, your profit could be zero (or a loss)...basic accounting...look it up

NHL has not been gate-driven for a long time but the beer and food sales at game are actually the biggest source of income, followed by TV and radio rights

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#29 kittensandcookies
January 11 2016, 10:12AM
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RealMcHockeyReturns wrote:

Sorry wrong on both counts

Revenues not the same as profit at all...MAY lead to profits but if still paying high player salaries with lower revenues, your profit could be zero (or a loss)...basic accounting...look it up

NHL has not been gate-driven for a long time but the beer and food sales at game are actually the biggest source of income, followed by TV and radio rights

Do you know what != means? It means "Does not equal".

Kevin R is saying that teams GET PROFIT from league REVENUE sharing, which is totally wrong, because only the money losing teams get revenue sharing.

So, let me get this straight. The league is not gate driven, but you're claiming food and beer sales are the biggest source of REVENUE (NOT INCOME), but, um, how do you think they get beer and food sales, if not for the people that are actually at the games?

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#30 ET
January 15 2016, 11:27AM
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Sexxxfan69 wrote:

F-ing NDP

You've got to be a Calgarian if you are seriously trying to blame slumping oil prices on the NDP. Wake up and smell the coffee!

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