Ottawa’s plan to introduce a two-per-cent tax on corporate stock buybacks may not be a windfall tax on oil profits like the United States is proposing, but the oilpatch still thinks it’s a policy designed to specifically target energy companies that have been plowing profits into shareholder returns.

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'A dart in the forehead of the energy industry': Oilpatch reacts to tax on stock buybacks Back to video

Unveiled in Ottawa’s fall economic update Thursday — and framed as a way to encourage companies to make investments in their workers and businesses — the tax on share buybacks will come into force Jan. 1, 2024, and is expected to generate $2.1 billion in revenues for the federal government over five years.

“This is a dart in the forehead of the energy industry,” said Rafi Tahmazian of Canoe Financial, reacting to the news. “The only way to get more energy is to incent the industry and they’re doing the opposite.”

Finance Minister Chrystia Freeland said the tax would be similar to the one-per-cent buyback tax contained in the U.S. inflation act signed into law earlier this year.

The announcement comes in the middle of quarterly earnings for the energy sector. While energy prices have climbed down from their 2022 highs following Russia’s invasion of Ukraine, global supplies have remained tight and oil and gas companies have continued to rake in significant profits this quarter.

Cenovus Energy Inc., Imperial Oil Ltd. and Canadian Natural Resources Ltd. all reported higher earnings in the third quarter of 2022 compared to the the same period last year — amounting to nearly $10 billion in profit. Each of the companies have spent significantly this year on share buyback programs, with Imperial announcing this week a $1.5-billion substantial issuer bid to buy back shares from investors.

Canadian oil and gas companies emerged from a protracted downturn in energy prices in 2021 with a renewed focus on shareholder returns in a bid to attract investment, with most companies eschewing spending on new projects in favour of debt repayment, dividends and share buybacks — a pattern that has become entrenched as investors reward companies committed to shareholder returns, while simultaneously punishing organizations that have increased capital spending.

It’s not yet clear how companies will react to the new policy, though some experts predict a deluge of share buybacks between now and when the tax comes into effect in January 2024.

In a statement Thursday, Canadian Natural said it would wait to hear details about the new tax before commenting. “That said, providing energy security requires a strong oil and natural gas sector, which also generate substantial, positive social and economic benefits for Canadians,” the company said.

Some energy investors have predicted that companies will prioritize dividends over buybacks starting in 2024. Few believe the outcome of a tax on buybacks will be investment in operations.

“We’re getting some mixed messages from the federal government around production,” said Tristan Goodman, president of the Explorers and Producers Association of Canada. “What we’re hearing or have been hearing for many years is that we’re ready to move away from increasing production, and I think that’s now shifted.”

Goodman said the Canadian energy industry has struggled to attract investment and has therefore focused on boosting shareholder returns to sustain investor interest in the sector — a pattern he doesn’t expect to see disrupted by the new tax.

“Industry will adapt to this, but it certainly doesn’t assist or support investments into Canada,” he added.

• Email: mpotkins@postmedia.com | Twitter: mpotkins