June 5, 2023

The share buyback tax hits the oil and gas sector. Was that the whole point? | CBC News

This week, Ottawa announced plans to introduce a share buyback tax at a time when oil and gas companies have again reported windfall profits and excess share buybacks.

Buybacks mean that publicly listed companies buy back part of their own shares from the stock exchange at the market price. They are a way to reward existing investors, but also to tie up money that could be used to grow the business – or, in the case of oil and gas companies, to pay for climate mitigation measures.

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Cenovus, which launched a stock buyback program in November 2021, has since purchased approximately 118 million shares of common stock and returned approximately $2.5 billion to shareholders. The company’s share buyback program is coming to an end; it is going to fetch another.

Canadian Natural Resources has returned about $5.1 billion to investors so far this year in share buybacks, when it had so far spent about 940 million dollars on buybacks last year.

Suncor has bought back approx 4.6 billion dollars of its common stock this year, up 1.7 billion dollars by the end of September last year.

And ConocoPhillips has bought back $6.5 billion in stocks this yearup $2.2 billion this time last yearand has increased the existing share repurchase authorization by $20 billion.

With the new two per cent tax announced for 2024, Ottawa expects to bring in $2.1 billion over five years and encourage businesses to reinvest their profits into workers and businesses.

But will this tax directly target the oil label or is it just one of the industries most affected by it – if not the industry that would have been most affected by the government?

Destination or coincidence?

Just days before the tax was introduced, Environment Minister Steven Guilbeault released a video on Twitter criticize the industry on how it spends record profits.

“When Canadians see these gains, we need to invest in cleaner energy instead of share buybacks,” he said.

“Dollars must start flowing,” the minister said regarding the emission reduction plans already announced by the energy companies.

This follows a report released earlier this fall by the Pembina Institute that criticized the industry for spending too much on dividends and share buybacks and not enough on reducing carbon emissions. (The Pathways Alliance, a group of major oil companies that have pledged their own net zero goals, has disputed that characterization.)

“I think this is an acknowledgment that we’re not seeing these companies put their record profits into reducing emissions, which needs to happen,” said Jan Gorski, director of the Pembina Institute’s oil and gas program.

Jan Gorski is the Oil and Gas Program Director at the Pembina Institute. (Kyle Bakx/CBC)

But Martin Pelletier, a Calgary-based senior portfolio manager with Wellington-Altus Private Counsel, isn’t so sure. He said the government was likely looking at the oil and gas sector for its success, but believes it aimed more at mimicking US policies that could generate additional revenue for the government, rather than sending a specific message.

“I think being tied to the environment is a stretch,” said Pelletier.

Martin Pelletier is a senior portfolio manager at Wellington-Altus Private Counsel. (Colin Hall/CBC)

Duncan Kenyon, with the group Investors for Paris Compliance, sees it the same way: a tax partly inspired by windfall profits in the oil and gas industry – but not necessarily targeted at the sector, especially since it won’t take effect until 2024.

“If you really wanted to send a strong signal to a particular sector about their investment needs, this is not the way to do it,” he said.

Buybacks do not improve or expand a company’s underlying business, but they do increase share prices and improve various profitability metrics by reducing the number of shares in the company, which investors generally welcome.

The tax is expected to enter into force in January 2024. More detailed information is promised in the 2023 budget.

Asked at a news conference about windfalls in the energy sector and whether a one-off tax would have been appropriate, Deputy Prime Minister Chrystia Freeland referred to the new tax on share buybacks as an “appropriate additional tax measure”, although she did not comment. of the profits of a particular industry.

In a statement to CBC News, a spokesperson for his office stressed that the tax would apply to “all types of public company share buybacks across all sectors.”

What difference does it make?

Whether or not the tax was specifically targeted at the oil point, it remains to be seen how much of an impact it will have on the industry.

The Canadian Association of Petroleum Producers has said it is concerned a two percent tax on share buybacks, double the rate considered in the United States, could discourage investment in Canadian companies and jeopardize returns for Canadian shareholders.

Pelletier, meanwhile, described the tax as “irrelevant” and said companies can find other ways to use the extra cash, such as raising dividends and paying down more debt.

Duncan Kenyon is a member of Investors for Paris Compliance. (Monty Kruger/CBC)

Kenyon expects a similar outcome.

“They’re looking for mechanisms to return capital to investors when there’s this kind of cash flow, and they’re finding other ways to do that,” he said, adding that other aspects of the financial update, such as the proposed incentives for clean technology and strengthening the tax credit for carbon dioxide capture, use and storage are more likely to increase investment.

Gorski, on the other hand, is still hopeful that the tax will not only encourage companies to direct part of their cash resources to investments, but to invest specifically in reducing emissions.

“I think this is a good start and as we go forward we need to continue to evaluate how companies are spending their money,” he said.

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