‘This is a tragedy for Canada’: Fear and dismay as Encana chooses U.S. as its new home
By Geoffrey Morgan and Tyler Dawson
CALGARY / EDMONTON – Described as a “tragedy” in a downtrodden industry, one of Canada’s oldest and largest energy companies Encana Corp. is dropping Canada from its name and moving to the United States to attract more investors.
“Make no mistake, we have a long and proud history in Canada and our assets here are world-class,” Encana president and CEO Doug Suttles said on an investor call Thursday morning, where he announced what many in Calgary had long feared – the company’s headquarters was moving to the U.S. and the iconic company would be renamed Ovintiv Inc.
But industry observers see it as another symbolic blow to the Canadian oilpatch that’s been broadsided by low commodity prices, stringent regulations, transport constraints and opposition from climate activists over the past decade.
Alberta Premier Jason Kenney said the combination of federal laws around new pipeline development and rhetoric about phasing out the energy industry had created “an inhospitable environment” for companies like Encana and exacerbated the underperformance of the Canadian energy sector.
“What we’ve seen in the last five years is companies from Kinder Morgan to now Encana have taken the hint,” Kenney said, adding the country has seen an exodus of foreign capital.
Texas-based Kinder Morgan Inc. sold its Trans Mountain pipeline and expansion project to the federal government last year for $4.5 billion after being stuck in a regulatory quagmire for years. The company then sold off its remaining assets in Canada to Pembina Pipeline Corp. this year.
The move had been rumoured in Calgary for over a year because Suttles left Calgary in 2018 to live closer to his family in Denver and publicly described steering Encana toward a “headquarter-less model.”
Then in late 2018, Encana spent US$7.7 billion to buy Newfield Exploration, a move which shifted Encana from being a producer with assets split evenly between Canada and the U.S. to being 60 per cent weighted in favour of the U.S.
While the relocation didn’t surprise, it did send shockwaves through the industry as analysts, investors and executives described the loss as “a tragedy” given the company’s history, with roots that trace back to the construction of the Canadian Pacific Railway, and its size.
“Here’s a company that had Canada in their name,” St. Louis-based Edward Jones senior analyst Jennifer Rowland said, adding that she wasn’t surprised by the move and expects the company to try to sell off “non-core assets” in Canada.
Former Alberta finance minister and energy minister Ted Morton, now an executive fellow at the University of Calgary School of Public Policy, called Encana’s relocation “a particularly bitter pill to swallow” given the company’s history, as one of its predecessor companies was Alberta Energy Co. Ltd. formed by the revered former Alberta premier Peter Lougheed to directly invest in the province’s oil and gas development.
“The initial share offering was only to Albertans, so this is how Peter Lougheed said Albertans can participate in our shared ownership of oil and gas,” Morton said, adding Encana’s exodus will fan the flames of Alberta alienation given that Ottawa reportedly attempted to prevent SNC-Lavalin Group Inc. from relocating its headquarters from Montreal to London.
“I don’t think it’s alarmist to call it a crisis. This is a Main Street issue — people are losing their jobs, people are losing their houses,” said Morton.
Formed out of the $23-billion merger between PanCanadian Energy Corp. and Alberta Energy Co. Ltd. in 2002, EnCana Corp. was the largest oil and gas producer in the country for the next seven years until the company decided to break out its unconventional oil business into oilsands-focused Cenovus Energy Inc. in 2010.
“I don’t think it’s alarmist to call it a crisis. This is a Main Street issue — people are losing their jobs, people are losing their houses
In 2014, Encana spun out PrairieSky Royalty Ltd. in an initial public offering that offloaded the company’s royalty lands that date back to the CP Rail development in the 1880s. Since then, it has sold off numerous non-core assets in Canada and the U.S. to pay for acquisitions like the $7.1-billion acquisition of Texas-focused Athlon Energy in 2014 and the more recent purchase of Oklahoma-focused Newfield.
While the company has shrunk over time, the departure of Encana is a symbolic loss for the Canadian oil and gas industry that has been fighting against an exodus of capital for the past five years, said Ken Hughes, another former Alberta energy minister and now the chair and co-founder of Alpine Insurance and Financial Inc.
“There is a very substantial advantage to being domiciled in the United States right now,” Hughes said, adding that “the capital doesn’t reside in Canada.”
Cenovus Energy CEO Alex Pourbaix told a post-earnings analyst conference that, “I think this is a tragedy for Canada.”
For its part, Encana signalled that it’s planned relocation to the U.S. was aimed at attracting more investment from funds that track American indices.
I think this is a tragedy for Canada
Cenovus Energy CEO Alex Pourbaix
“This is due in part to the inability to access certain pools of capital in the United States that are limited in investing in securities of foreign companies,” the company’s chief financial officer Corey Code said on Thursday’s earnings call.
“As a U.S. company, we may be able to attract deeper and growing pools of investment capital in the United States,” he said.
Eric Nuttall, senior portfolio manager and partner with Ninepoint Partners in Toronto, is one of the few active energy fund managers left in Canada. “I see the logic,” he said of the transaction, noting that the trend in money management in Canada and the U.S. has shifted from active to passive investing with more and more funds following indices.
He said that Canadian passive funds that invest based on domestic indices will likely sell 200 million shares in Encana as the company moves south. But the upside to Encana is clear because a larger group of American passive funds would be poised to buy up 325 million shares as a result of the move.
The company’s stock fell 6.33 per cent by close on Thursday to $5.18 on the Toronto Stock Exchange, on concerns that some Canadian funds may be unable to invest in shares, according to analysts at Eight Capital.
“In coordination with the change in corporate domicile, a consolidation and share exchange will be completed for effectively one share of common stock of Ovintiv for every five common shares of Encana,” Phil Skolnick, analyst at Eight Capital said in a report.
While the company said it isn’t planning layoffs in Canada and plans to continue to invest in the Montney and Duvernay natural gas formations in Alberta and B.C., nervousness and fear over continued jobs.
“This is a sad day in Canada,” said Fort St. John, B.C. Mayor Lori Ackerman. “We know why these companies are moving, the uncertainty in Canada just does not allow for good investment.”
She said she’s worried about the “dedicated staff” who live in the community and work for Encana and she’s concerned that, with the switch in jurisdiction, those jobs might not continue to exist. “This could be part of just pulling the yarn and unravelling what we have in Canada.”
Ackerman said she worries about the ripple effect in her community, where jobs in the energy sector help provide revenue for social services such as hospital foundation and broader social safety services in Canada. Her reaction to Encana’s departure: “really, really disappointed.”
Dale Bumstead, the mayor of Dawson Creek in B.C., said he’d barely had time to register the news Thursday morning, but it says a lot about the flooding of the natural gas market.
“I think this is more and more of a signal of the difficulties that the energy producers in Canada are having,” Bumstead said. “They’re looking for a way to expand their business potential and that seems to be in the States.”
The new company will rebrand after shareholder, stock exchange and court approval, which is expected to occur by early 2020. The company plans to retain its listing on the Toronto Stock Exchange.
Separately, the company said operating profit for the third quarter rose to 15 cents per share. U.S. operations accounted for 60.5 per cent of Encana’s total revenue in this quarter, while Canada contributed 24.8 per cent.