Varcoe: ‘Epitome of stupidity’ — Oilpatch, investors fume over Ottawa’s new tax on share buybacks

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Another big day of Canadian oilpatch earnings, dividends and share buybacks greeted the sector on Thursday, but it was overshadowed by a new development in Ottawa: an incoming federal tax on companies buying back their own stock.

As part of the fall fiscal update, federal Finance Minister Chrystia Freeland announced plans to introduce a tax on stock repurchases by public companies, part of the government’s effort “to encourage them to reinvest their profits in workers and in Canada.”

Reaction from the business community and energy sector, where share buybacks have been ballooning in the past two years, was swift — and scathing.

“It’s a really misguided, bad idea and a windfall tax in another name,” said Scott Crockatt of the Business Council of Alberta, noting energy companies have been among the country’s most active firms buying back their stock.

“It is the epitome of stupidity,” added Eric Nuttall, a senior portfolio manager with Ninepoint Partners.

“This isn’t going to drive incremental investment, who are we kidding? And this is a government that very clearly doesn’t want incremental investment anyways.”

Earlier this year, the new U.S. Inflation Reduction Act passed a one-per-cent excise tax on corporate share repurchases, beginning in 2023.

In Canada, the tax will kick into place at a corporate level in January 2024 at a two-per-cent rate. It is expected to hike federal revenues by $2.1 billion over five years.

Share buybacks in the energy sector have increased in popularity as industry profits have grown and companies look to return money to investors.

Petroleum producers are also spending more money in Canada — about $33.5 billion this year and an estimated $36 billion in 2023, according to consultancy Wood Mackenzie — although it’s a smaller percentage of their free cash flow than in years past.

The new federal tax “is a recognition that we’re not seeing the investment from the oilsands companies in decarbonization. So it’s a step in the right direction,” said Jan Gorski, director of the Pembina Institute’s oil and gas program.

However, instead of drawing more spending into the country, the plan “will further reduce investment into Canada’s energy sector,” said Tristan Goodman, head of the Explorers and Producers Association of Canada (EPAC).

“It’s really further hostility towards the business community in Canada.”

According to Wood Mackenzie, Canada’s five largest public oilsands producers repurchased $16.4 billion of their own shares from the start of 2021 through June of this year.

Those numbers are growing.

Canadian Natural Resources, the country’s largest petroleum producer, announced Thursday third-quarter profits of $2.8 billion, up 28 per cent from a year ago, as oil and gas prices remained strong during the period.

The company boosted its quarterly dividend by 13 per cent and said share repurchases during the third quarter reached $1.7 billion — and $5.1 billion for the year.

The Calgary-based producer also pointed out it expects to pay about $11 billion this year to various levels of government in Canada through income taxes, property taxes and royalties, a 120 per cent jump from last year.

In an interview before the federal announcement, Canadian Natural president Tim McKay declined to comment on the new tax, but noted the company is investing more this year.

Canadian Natural expects its capital budget to reach $4.9 billion this year, a 41-per-cent increase from 2021 levels.

And there are obstacles to spending even more.

“We increased our budget this year and we couldn’t absolutely spend any more on projects because you need regulatory permits. You need the supplies,” McKay said in an interview.

“It’s always nice to say you could spend more, but physically in this environment, you couldn’t.”

McKay pointed at regulatory issues as another challenge to seeing producers spend more.

“If Canada really supported more LNG plants and changed both the fiscal and potentially the regulatory environment so that these projects could proceed quicker, you would see more activity, which creates more jobs and more economic benefit to Canada,” he said.

Other companies also released strong results on Thursday.

Tourmaline Oil Corp., the country’s largest natural gas producer, reported a profit of $2 billion for the quarter, up from $361 million a year earlier.

Integrated producer Suncor Energy announced operating earnings for the third quarter of $2.6 billion, an increase from $1 billion a year earlier.

However, the Calgary-based company reported a net loss of $609 million for the quarter, due in part to a non-cash charge tied to expanding its stake in the Fort Hills oilsands mine.

Last month, it agreed to buy Teck Resources Ltd.’s 21 per cent interest in Fort Hills for $1 billion, hiking Suncor overall stake to 75 per cent.

However, the deal’s valuation saw Suncor take an after-tax $2.6-billion impairment on its existing interest in the operation.

“It is a long-life asset, it has low-intensity GHG barrels, and we were able to transact at a very compelling value for our shareholders,” Suncor interim CEO Kris Smith said on a conference call.

During the third quarter, Suncor returned about $1.7 billion to shareholders, including $1 billion in share repurchases and $638 million in dividends.

Companies in the oilpatch have increasingly turned to share buybacks, in part because stock repurchases are a less entrenched way to reward investors than through hiking base dividends, which are harder to cut, said Laura Lau, chief investment officer with Brompton Group, which owns stock in Canadian Natural.

“The big thing with share buybacks is the flexibility,” she said.

Nuttall expects the new tax will propel energy companies to increase their dividends and special dividends, but doubts they will spend incrementally more to grow production in today’s environment.

“This will not increase a single barrel of production in Canada,” said Nuttall. “All it does is makes our sector feel even more alienated and potentially less competitive.”

Chris Varcoe is a Calgary Herald columnist.

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