Canada's share buyback tax could backfire, energy sector warns

Advantage Energy

07/11/2022 12:00

(Repeats to additional subscribers)
    By Rod Nickel and Nia Williams
       Nov 6 (Reuters) - Canada's proposal to tax corporate
stock buybacks is unlikely to deter oil and gas companies from
returning cash to shareholders and may instead put them at a
competitive disadvantage, industry officials and analysts said.
    Canadian energy companies have been the most active in
buying back shares of any sector during the past year, according
to CIBC, and also funnelled profits from high prices into
dividends and debt payments, limiting new production
investments.
    On Thursday, the Liberal government proposed a 2% tax on
buybacks to encourage companies to reinvest in their workers and
business.
    The tax will generate an estimated C$2.1 billion ($1.6
billion) over five years and take effect on Jan. 1, 2024.
    The Canadian Association of Petroleum Producers (CAPP) and
the Explorers and Producers Association of Canada both said the
tax, double of a 1% measure in the United States, would be a
competitive disadvantage.
    The tax "may have the unintended effect of discouraging
investment into Canadian-run businesses while putting the
shareholder returns of Canadian investors at risk," said CAPP
President Lisa Baiton.
    The tax could especially hurt small companies which have
fewer resources, said Michael Belenkie, CEO of Advantage Energy
 AAV.TO , a 54,000-barrel-of-oil-equivalent-per-day producer.
     "If you take away the ability to buy back equity when times
are good, then you restrict the ability and desire to issue
equity when times are bad," he said. 
    Canada's four largest producers - Canadian Natural Resources
Ltd  CNQ.TO , Cenovus Energy  CVE.TO , Suncor Energy  SU.TO  and
Imperial Oil  IMO.TO  - spent C$15.8 billion combined on
buybacks in 2022's first three quarters, according to Tudor
Pickering Holt (TPH). 
        At the same time those companies have held back from
significantly boosting production because of concerns about
volatile prices and slowing long-term oil demand. 
    Overall, Canadian companies repurchased a record-high C$69.1
billion of shares during the 12 months through the third
quarter, CIBC Capital Markets said in a note. The tax's timing
is "peculiar," and gives companies opportunity next year to
launch more substantial issuer bids - buybacks of more than 10%
of shares outstanding, CIBC added.
    Matt Murphy, TPH director of energy research said companies
are unlikely to accelerate buybacks next year because they have
already committed to capital allocation policies.
    The tax may not deter oil companies' buyback intentions
anyway, said Eight Capital analyst Phil Skolnick, who covers the
sector.
    "If a company feels like their stock is cheap, I don't think
a 2% tax will stop them," from offering investors the
opportunity to sell it back, he said.
    Martin Pelletier, senior portfolio manager at
Wellington-Altus Private Counsel, who manages shares in oil
sands companies, said the tax could nudge firms into spending
more on acquisitions, but not their own operations.
    "Maybe it incentivizes them to do more M&A, because they
certainly can't put (investment) in the ground," he said,
referring to strict regulatory requirements. "They're going to
weigh their options."
    Canadian Natural and pipeline company TC Energy  TRP.TO 
declined to comment. Suncor, Cenovus and Imperial did not
respond to requests for comment.
    Deputy Prime Minister Chrystia Freeland defended the buyback
tax to reporters on Thursday saying it gives companies the
"right incentives" to invest in production and workers.
    Michael Smart, professor of economics at University of
Toronto, said the tax moves in the right direction. Investors
pay less tax currently on income from selling shares back to
companies than they do on dividends.
    "This is a small step towards fixing our tax system," he
said.
 ($1 = 1.3516 Canadian dollars)
 (Reporting by Nia Williams in British Columbia and Rod Nickel
in Winnipeg; Additional reporting by Julie Gordon in Ottawa;
Editing by Josie Kao)
 ((nia.williams@thomsonreuters.com; +1 403 531 1624; Reuters
Messaging: nia.williams.thomsonreuters.com@reuters.net))