Varcoe: ‘Embodiment of stupidity’ – Oilpatch, investors fuming over Ottawa’s new share buyback tax

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Another big day of Canadian oil patch earnings, dividends and share buybacks greeted the industry on Thursday, but it was overshadowed by a new development in Ottawa: a future federal tax on companies that buy back their own shares.

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As part of the fall fiscal update, federal Finance Minister Chrystia Freeland announced plans to introduce a tax on public company share buybacks as part of the government’s effort to “encourage them to reinvest their profits back into workers and Canada.”

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The reaction from business and the energy sector, where share buybacks have increased over the past two years, was swift and devastating.

“It’s really misguided, a bad idea and a random tax by another name,” said Scott Crockatt of the Business Council of Alberta, noting that energy companies have been among the most active share buybacks in the country.

“It’s the epitome of stupidity,” added Eric Nuttall, senior portfolio manager at Ninepoint Partners.

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“This will not lead to further investment, who are we kidding? And this is a government that clearly does not want further investment.”

Earlier this year, the new US Inflation Reduction Act approved a 1 percent excise tax on corporate stock buybacks beginning in 2023.

In Canada, the tax will take effect at the corporate level in January 2024 at a two percent rate. It is expected to raise federal revenue by $2.1 billion over five years.

Energy share buybacks have grown in popularity as industry profits have increased and companies want to return money to investors.

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

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The new federal tax “is an acknowledgment that we’re not seeing investments from oil and sands companies to reduce carbon emissions. So it’s a step in the right direction, said Jan Gorski, director of the Pembina Institute’s oil and gas program.

Instead of attracting more spending to the country, the plan will “further reduce investment in Canada’s energy sector,” said Tristan Goodman, executive director of the Explorers and Producers Association of Canada (EPAC).

“It increases hostility towards Canadian business.”

According to Wood Mackenzie, Canada’s five largest public oil sands producers bought back $16.4 billion of their own shares between the start of 2021 and June of this year.

Those numbers are growing.

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Canadian Natural Resources, the country’s largest oil producer, reported a third-quarter profit of $2.8 billion on Thursday, up 28 percent from a year earlier, as oil and gas prices remained strong during the period.

The company raised its quarterly dividend by 13 percent and said share buybacks totaled $1.7 billion in the third quarter — and $5.1 billion for the year.

The Calgary-based producer also noted that it expects to pay about $11 billion to various levels of government in Canada this year through income taxes, property taxes and royalties, a 120 percent increase over 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.

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

And there are even more barriers to consumption.

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

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

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

“If Canada really supported more LNG facilities and changed both the taxation and possibly the regulatory environment to allow these projects to move forward faster, you would see more activity, which would create more jobs and more economic benefit to Canada,” he said.

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Other companies also posted strong results on Thursday.

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

Integrated producer Suncor Energy reported third-quarter operating profit of $2.6 billion, up 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 payment tied to expanding its stake in the Fort Hills oil sands mine.

Last month, it agreed to buy Teck Resources Ltd.’s 21 percent stake in Fort Hills for $1 billion, bringing Suncor’s total stake to 75 percent.

However, according to the deal’s valuation, Suncor took a $2.6 billion after-tax write-down on its existing holdings.

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“It’s a long-lived asset, it has low-intensity barrels of greenhouse gas, and we were able to close the deal at a very attractive value to our shareholders,” Suncor Interim CEO Kris Smith said on a conference call.

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

Oil trading companies have increasingly turned to share buybacks in part because share buybacks are a less entrenched way of rewarding investors than floating-rate dividends, which are harder to cut, says Laura Lau, chief investment officer at Brompton Group, which owns the stock. In Canadian Natural.

“The big thing about stock buybacks is flexibility,” he said.

Nuttall expects the new tax to prompt energy companies to increase their dividends and special dividends, but doubts they will spend incrementally more to boost production in the current environment.

“This will not add a single barrel of production in Canada,” Nuttall said. “It just makes our industry feel even more alienated and potentially less competitive.”

Chris Varcoe is a columnist for the Calgary Herald.

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