Encana shocked shareholders when the oil and gas producer announced a re-incorporation in the U.S. from Canada. Encana discovered a link between U.S. incorporation and higher levels of passive investment. In the past year, Encana has lost over 40% of its share value and needs to do something to stem its losses before it becomes one of the dozens of Canadian energy stocks to face delisting on the TSX.
U.S. incorporation may be the only option for this struggling oil producer. The TSX has softer demand for energy stocks than the United States. Only 21% of Encana’s shareholders live in Canada, while the rest reside in the U.S. Abandoning Canadian incorporation in favour of the U.S. may ultimately help the stock price and shareholders.
Canadian index funds oppose the move
Canadian index funds adamantly oppose Encana’s plans to move to the U.S. Canadian stock index funds look at the country of affiliation when making investments. These index funds cannot maintain portfolio positions in a historically Canadian stock once it changes its nation of incorporation.
These index funds don’t want to sell their shares for a substantial loss when they do not benefit from the move to the U.S. Because the stock is down so far for the year, Encana’s move would force these investors to realize significant capital losses. If the funds invested five years ago, the shareholders could expect up to a 73% loss, including the offset of the dividend returns.
Bullish U.S. sentiments drive decision
Big players are upbeat on U.S. oil prospects, including Exxon Mobile, which recently announced a decision to divest a Nigerian asset to shift resources toward U.S.-based oil production. U.S. president Donald Trump is in the White House engaging in aggressive negotiations globally, including with Saudi Arabia, Iran, Venezuela, and other oil-producing countries. There may be some shifting sympathies for the high-cost oil industry in the U.S., leading to greater cooperation with OPEC to share the output with the U.S.
It just doesn’t look like Canada is reaping many benefits from the changing geopolitical landscape. Energy Minister Sonya Savage recently permitted Canadian oil producers to increase domestic oil output. More specifically, the energy department specified that only oil output, which can be shipped by train, qualifies for the exclusive production allowance program.
Encana is willing to sacrifice capital from Canadian indices for an estimated $1 billion of additional demand for shares from the U.S. affiliation. Encana believes that greater access to passively managed accounts and U.S. index funds will be an overall benefit to shareholders and the company. On average, Encana’s U.S. peers receive around 20% greater capital investment from passively managed accounts than Encana.
Every Canadian should watch the energy sector, as it impacts costs for all businesses. Supply and demand changes have rippling effects throughout the Canadian economy. The one thing Canadian investors should not do is put their money in energy stocks. No matter how tempting these dividends, they still don’t make up for the significant declines in share value.
The one thing you should learn from the controversy between Encana and its shareholders is that Canadians need to protect their initial investment and stay away from stock market indices that invest in struggling sectors on the TSX. You’ll have better luck self-managing your retirement portfolio.
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Fool contributor Debra Ray has no position in any of the stocks mentioned.