According to industry leaders and analysts, Canada’s proposal to tax corporate stock buybacks is unlikely to prevent oil and gas producers from returning cash to shareholders and may even make them less competitive.
According to CIBC, Canadian energy companies have been the most aggressive in buying back shares of any sector over the past year. They have also used their high price earnings to pay dividends and debt, which has limited their ability to make new production expenditures.
In an effort to encourage businesses to reinvest in their employees and operations, the Liberal government suggested a 2% tax on buybacks.
The tax, which will go into effect on January 1, 2024, is expected to generate C$2.1 billion ($1.6 billion) over the course of five years. The tax, which is twice as high as a 1% measure in the United States, would put Canadian producers at a competitive disadvantage, according to both the Canadian Association of Petroleum Producers (CAPP) as well as the Explorers and Producers Association of Canada.
According to CAPP President Lisa Baiton, the tax may have the unforeseen impact of limiting investment into Canadian-run enterprises while placing the returns on capital of Canadian investors at risk. As per the CEO, Michael Belenkie, of Advantage Energy, which produces 54,000 barrels of oil equivalent per day, the levy may particularly harm small businesses because they have fewer resources.
He remarked that if one limits the capacity and desire to issue equity when circumstances are bad, then one limits the ability and want to buy back equity when times are good. According to Tudor Pickering Holt, Canada’s top four producers, Canadian Natural Resources Ltd., Cenovus Energy, Suncor Energy, and Imperial Oil, spent a total of C$15.8 billion on share buybacks in the first three quarters of 2022.
These businesses haven’t increased production considerably, though, because they’re worried about price volatility and a long-term slowdown in oil consumption.
In total, Canadian companies bought back C$69.1 billion worth of shares during the 12-month period ending in the third quarter, according to a note from CIBC Capital Markets. The timing of the levy is unusual, because it offers businesses the chance to conduct larger issuer bid buybacks of more than 10% of outstanding shares in the following year.
Companies are unlikely to increase buybacks next year since they’ve already committed to capital allocation policies, according to Matt Murphy, director of energy research at TPH. According to sector-focused Eight Capital analyst Phil Skolnick, the tax may not have much of an impact on oil companies’ ambitions to repurchase stock.
A 2% tax, he argued, won’t preclude a corporation from providing investors the option to sell their stock back if they feel like it is cheap. The levy could encourage businesses to spend more on purchases but not on their own operations, according to senior portfolio manager at Wellington-Altus Private Counsel, Martin Pelletier, who oversees shares in oil sands companies.
He remarked, alluding to stringent regulatory requirements, that maybe it entices them to conduct more M&A, since they obviously can’t put money in the ground. They will consider their choices. TC Energy, a pipeline firm, and Canadian Natural declined to comment.
The buyback tax is justified, according to Chrystia Freeland, Deputy Prime Minister, by providing businesses with the proper incentives to engage in personnel and production.
The tax is a step in the right direction, according to University of Toronto economics professor Michael Smart. Currently, investors pay less tax on revenue from the sale of their shares back to businesses than they do on dividends.
He declared, this is a steppingstone toward correcting the tax system.