As Encana planned its move, U.S. stockholders fled

Open this photo in gallery:

When Encana Corp. announced a plan to move to the United States and rename itself Ovintiv, it knew many Canadian money managers would sell its stock. The long-term goal was to attract big U.S. investors instead.

New regulatory filings show, however, that multiple U.S. institutional investors also sold off huge positions in Encana stock in 2019’s fourth quarter, even before the move to the United States became effective.

It was the culmination of a year in which institutional investors soured on the company for its poor performance. The heavy selling pressure over the past several months, from both sides of the border, helps explain how Ovintiv shares hit a 52-week low on Tuesday – which was also the lowest closing price since the creation of Encana in a 2002 merger.

Records filed with the U.S. Securities and Exchange Commission and compiled by S&P Global Market Intelligence show a dozen institutional investors sold off at least one million Encana shares in the fourth quarter. Only four of the 12 were Canadian. Two firms – Whitebox Advisors LLC of Minneapolis and Guardian Capital LP of Toronto – sold off their entire stakes of roughly 1.5 million shares each. (Both firms declined to comment.) Three of the other sellers of at least one million shares – just one of which is Canadian – disposed of at least 90 per cent of their holdings during fourth-quarter sales.

To be sure, some U.S. institutions have been buyers. While many firms were exiting, one made a huge bet: San Francisco-based Dodge & Cox began buying Encana in the third quarter and owned 28.5 million shares at Dec. 31, nearly 11 per cent of the company. The money manager cited Encana as a pick for its International Stock Fund, saying its “combination of low valuation and reasonable growth potential is scarce in today’s market.”

Ovintiv spokeswoman Cindy Hassler noted Dodge & Cox and Causeway Capital Management LLC, the company’s largest stockholder, together now own about 25 per cent of Ovintiv. “We feel very good about our list of top investors,” she said.

Encana said one of the primary reasons for the decampment to the United States was the desire to attract investment by large U.S. funds that track U.S. stock indexes.

In January, the company made its transformation official – moving the corporate headquarters to Denver from Calgary, incorporating in Delaware and renaming itself Ovintiv Inc. It also did a reverse one-for-five stock split (which is reflected in all share counts in this story). More than 90 per cent of shareholders voted in favour of the moves.

The short-term price to be paid, Ovintiv understood, was expulsion from the S&P/TSX Composite and other indexes based on the Canadian stock market – and the sale of millions of shares by funds that track those indexes. Indeed, on Jan. 23, more than 19 million shares of Ovintiv changed hands on the Toronto Stock Exchange, more than 10 times the normal daily volume. Ovintiv shares lost roughly one-third of their value in January selling.

That awful January was on the heels of a 2019 that saw Encana’s average share price fall every quarter. The S&P Global Market Intelligence data show institutions actually piled into the shares in the first quarter of last year, with a nearly four-to-one ratio of buying versus selling. Encana had completed the acquisition of U.S. oil company Newfield Exploration Co., a move several analysts questioned, and some investors saw the beaten-down shares as a value play.

It turned out to be a value trap instead, as the shares fell from an average of $45 in the first quarter to an average of around $30 in the third quarter, and about $28 in the fourth quarter, as the institutions sold.

“Investor frustration today is worse than in the immediate aftermath of the Newfield transaction and management is facing an uphill battle in regaining the faith of the investment community," said analyst Chris Cox of Raymond James.

Ovintiv released its earnings report on Wednesday, saying it had beaten earnings expectations and was on track to generate cash flow above its spending needs. The results helped stoke a brief bit of enthusiasm: The shares gained 5.4 per cent on Wednesday, but were down 0.7 per cent for the week, closing Friday at $20.89.

The near-term problem, however, is that Ovintiv has yet to be added to any meaningful U.S. indexes. At a market capitalization of about US$4.25-billion, it’s too small for the mainstay S&P 500, which requires US$8.2-billion of market value or more. It’s a better fit, by size, for the S&P MidCap 400. But that index has much less investor money following it, and it won’t see changes to its membership until a March rebalancing.

“From a funds flow perspective, they need to get into the S&P 400 for the potential passive buying from U.S. investors to offset the loss from Canadian index funds," Mr. Cox said. "Given the share price move we have seen, that seems like a challenge at this juncture, which obviously adds to the woes.”

Letko, Brosseau & Associates Inc., a Montreal-based investment management firm, had argued that the move put Canadian shareholders at a disadvantage, saying its internal estimates showed the potential loss of Canadian investment would have a bigger negative impact on the stock price than the increase in the U.S. holdings.

Lekto Brosseau was the company’s fourth-largest shareholder on Dec. 31, with just under 10.2 million shares, nearly 4 per cent of the company. It bought 3.2 million shares in the third quarter, then sold 322,365 shares in the fourth quarter. Peter Letko, the company’s senior vice-president, said his critical view of the transformation has not changed, but “what is done is done.”