Encana Corp.’s proposed move to the U.S. is “a lousy plan” that breaches the oil company’s responsibility to realize full value for Canadian investors and should be rejected, according to one of its largest shareholders.
Peter Letko, senior vice-president of Letko, Brosseau & Associates Inc., which holds about 4 per cent of the company’s stock, says his investment-management firm will vote against the move when the proposal is put to shareholders in the new year. And while he hasn’t canvassed other investors with the intention of forming a voting block, he said he hopes they follow his firm’s lead and “take the company to task” for what he believes is unfair treatment.
“It’s up to these other shareholders to consider their position and whether in fact they’re being properly treated by the board of directors of Encana,” he said.
The Canadian energy giant announced last month it plans to move its head office to Denver, and change its name to Ovintiv as Alberta’s energy sector struggles to retain investment. The company said it was hoping to access a larger source of investment from U.S. index funds.
Mr. Letko called it “an example of really bad corporate governance” that fails to take into account the impact on Canadian investors.
Encana chief executive Doug Suttles said in a statement Tuesday evening he was “disappointed” by Letko Brosseau’s comments, and added the company’s plan to move to the United States was “carefully considered” by the board.
“The change in corporate domicile will not change how we run our day-to-day business, nor diminish the important role our Canadian assets play in our portfolio today. We do not believe that our Canadian investors will be forced to sell beyond the Canadian indices, and we will remain listed on both the TSX and the NYSE,” Mr. Suttles said.
Mr. Letko’s major criticism of Encana’s proposal is that investors who hold stocks under a mandate to buy into Canadian companies may have no choice but to sell those shares at a greatly undervalued price.
“The board doesn’t seem to have given this any consideration,” he said. “If they did consider it carefully, then I think it’s a breach of their responsibility to shareholders.”
When Mr. Suttles announced Encana’s intention to move its legal base last month, he told a conference call the move would allow the company access to a much larger source of investment from U.S. index funds, which hold shares based on companies’ positions in various stock indices. Such investing has become common as instruments including exchange-traded funds have grown in popularity.
On Tuesday, Mr. Letko pointed to the company’s follow-up presentation to investors, which notes a net-positive potential shareholder gain thanks to larger U.S. index funds and passive investments and smaller Canadian funds.
“They’re basically saying, ‘These U.S. guys are going to be buying the stock and Canadian guys are going to be obliged to sell, and so what if they lose a bit of money?’ ” Mr. Letko said.
The board’s decision to rename and relocate is another in a long list of “poor strategic moves” by the company, he said, including efforts to boost its presence in U.S. shale oil via a US$5.5-billion acquisition of Newfield Exploration Co. one year ago.
The price of Encana shares fell nearly 7 per cent on the Toronto Stock Exchange when the company announced plans to move south. Although they rebounded by 24 per cent two weeks ago, by Tuesday they’d fallen once again by 17 per cent to $5.26. Shares have fallen by 61 per cent in the past year.
Mr. Letko hopes the value picks up in the near future – after all, he said, “it’s a fine company with great assets” – but he believes the planned move does nothing to improve the lot of shareholders.
He would like Encana to nix its plan altogether or, given the share-price tumble, conduct a pro-active stock buy to avoid becoming a takeover target.
“That would be much more helpful than trying to entice some passive index shareholders in the U.S. to buy the stock,” he said.
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