Poof! Why Encana today may have disappeared from your portfolio

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When the bell rings to open the Toronto Stock Exchange Friday, Encana Corp. will disappear from the major index that tracks the Canadian market – as well as from the portfolios of many Canadians, putting near-term pressure on the company’s share price.

S&P Dow Jones Indices is dropping the stock from both the S&P/TSX Composite index and the blue-chip S&P/TSX 60, because of the company’s plans to move to the U.S. from Canada and rename itself Ovintiv. Brookfield Property Partners LP joins the S&P/TSX 60, making it the third Brookfield enterprise in that index.

When Encana announced its plan to become a U.S. company, it said getting access to a bigger investing audience – specifically through index funds – was a motivation. But although it leaves the Composite and other indexes that include Canadian stocks, it won’t join any major U.S. indexes Friday.

That means Canadian funds that track the country’s stock indexes will be selling, while their U.S. counterparts won’t need to rush to buy the new Ovintiv stock.

Randy Ollenberger of BMO Nesbitt Burns Inc. said he expects anywhere from 90 million to 120 million of Encana’s shares, out of the 1.3 billion outstanding, will be sold, with about three-quarters of that the result of its removal from the Composite. Bryan Chuah, an analyst for CIBC World Markets, puts the number at 195 million shares.

Meanwhile, Mr. Chuah says, an Encana addition to the S&P MidCap 400, CRSP U.S. and Russell 1000 indexes – which he expects will account for 90 per cent of Encana index demand – will occur later. “This creates a possible scenario whereby Encana’s stock price could be under pressure initially from all the forced selling by Canadian indexers, which [would be] followed by incremental buying in the U.S. at a later date,” he wrote in a recent report.

Encana, at a market capitalization of about US$5-billion, is too small for the mainstay S&P 500, which requires US$8.2-billion of market value or more. (The index provider looks at “float,” adjusting market-value figures to strip out shares held by insiders.) That’s the big prize: S&P Dow Jones Indices estimates US$3.4-trillion is indexed to the S&P 500.

Instead, Encana is a better fit, by size, for the S&P MidCap 400. While S&P Dow Jones Indices is adding Encana to 14 small U.S. indexes Friday, including several focused on the energy industry, it did not add it to the MidCap 400.

S&P spokesman Ray McConville declined to speculate on Encana’s future index inclusion. For a company to be considered for inclusion in the S&P 500, S&P MidCap 400 or S&P SmallCap 600, Mr. McConville said, it must first be a constituent of the S&P Total Market Index. That will next be rebalanced in March, he said.

Tim Benedict, spokesman for the FTSE Russell group of indexes, said Encana will move to the FTSE USA Index and leave the FTSE Canada Index as of market close on March 20. The Russell U.S. indexes, which will be reconstituted this summer, use a different methodology, and he could not comment on whether Encana would be added.

Even in settling for the smaller U.S. indexes, though, Encana can win, Mr. Chuah of CIBC says. He believes U.S. index demand will cover the 195 million Canadian shares sold, plus another 120 million – bringing passive, index-fund ownership to 25 per cent of the company, from 15 per cent today.

Encana’s maneuovre isn’t available to just any Canadian company: S&P Dow Jones Indices has multiple tests of where a company is domiciled, including assets and revenue. More than half of Encana’s sales now come from the United States.

Shareholders approved the U.S. move, renaming and a reverse stock split Jan. 14, with 90 per cent of votes cast in favour. “There is clearly support for our efforts to expose Ovintiv to the deeper pools of capital in the U.S. – capturing the value we know exists within our equity,” chief executive Doug Suttles said in a statement.

With the exit of Encana, Brookfield Property Partners, with a market capitalization of about $11-billion, was added to the S&P/TSX 60. The index already featured Brookfield Asset Management Inc., the largest company in the Brookfield group, at roughly $80-billion in market capitalization, and Brookfield Infrastructure Partners, at about $21-billion. The three have a combined value comparable to either Royal Bank of Canada or Toronto-Dominion Bank, the two most valuable companies in the S&P/TSX 60.

Brookfield Property becomes the only real-estate company in the S&P/TSX 60, whose industry composition must resemble that of the broader Composite. Other candidates for inclusion CIBC’s Mr. Chuah forecast prior to the announcement were Air Canada (“the most likely”), Canadian Apartment REIT and Algonquin Power & Utilities Corp.