Encana Corp.'s decision to move its headquarters to the United States is a stark example of a trend that has seen oil and gas investments shift away from Canada, forcing banks and law firms to adapt to keep their clients.
As energy companies shift more assets and investments to the U.S., in response to diminished prospects in Canada and a thirst for new sources of capital, the fallout reverberates on Toronto’s Bay Street. Banks that could count on steady streams of fees from energy-sector clients such as Encana have spent the past several years building up their U.S. offices to follow a trail of advisory and underwriting work that is increasingly won south of the border.
When Encana announced its move Thursday, it sent an especially strong signal. It already had an American CEO living in the U.S., where the company was making most of its capital investment and major acquisitions. Even so, it is rare for a major Canadian energy company to take the ultimate step of legally moving to the U.S. And it comes at a tense political moment in Canada, after a bitter election campaign exposed serious fault lines between Alberta and Ottawa.
“This is just more bad news in the story we’ve been living and breathing in Calgary over the past several years and is reflective of the bigger picture in the Canadian oil and gas industry,” said Stephanie Stimpson, a partner in the Calgary office of law firm Torys LLP.
Negative investor sentiment has meant almost no capital has been raised in recent years, Ms. Stimpson said, translating into less work for legal and financial advisers.
In the pioneering years of the development of Alberta’s oil sands, investment banks and law firms built teams in Calgary to supply capital for multibillion-dollar projects, and many Canadian investment dealers opened offices in Houston and Denver to serve U.S. energy companies. But the dynamics of Alberta’s energy market turned upside down in 2014, when oil and natural-gas prices slumped and foreign players such as Royal Dutch Shell PLC and Kinder Morgan Inc. began selling oil sands assets and Canadian energy infrastructure.
Mergers and acquisitions and underwriting activity declined sharply, and many domestic and foreign players trimmed their Calgary ranks. As clients pivoted to fracking for shale gas in the U.S., for instance, banks responded by hiring more bankers in cities such as Houston to stickhandle energy deals aimed at U.S. investors. The banks also pushed investment and commercial bankers to adopt a more cross-border mindset.
That has helped them hold the line on fees by bringing in more U.S.-based work. The total value of financings raised by companies on the TSX and TSX Venture exchanges fell from $61.6-billion in 2014 to $32.6-billion in the first 11 months of the 2019 bank fiscal year, according to data from Bank of Nova Scotia. But over that same span, underwriting and advisory fees collected by Canada’s six biggest banks held relatively steady, at $4.6-billion or higher in most years.
"For both the bank-owned dealers and the boutiques in Canada, the commodity super-cycle provided a home-field advantage with respect to capital markets revenue for a number of years,” said Sumit Malhotra, a financial services analyst at Scotia Capital Inc. “Accordingly, the reduced level of investor appetite for mining and energy equities has clearly weighed on new issue activity domestically, and forced the investment banks to diversify from both a geographical and sectoral perspective.”
There is no certainty that Encana’s long-held relationships with Canadian banks will diminish simply because of a change of address. Encana’s finance department will stay in Calgary, the company still has investments in Canadian resources, such as the Duvernay gas deposits, and will still be subject to Canadian rules and regulations for those operations. The company works with about 20 banks inside and outside Canada, and there are “no changes expected,” spokesperson Cindy Hassler said in an e-mail.
But some things will change for the banks. Work that was once done in Calgary may shift to Houston or New York. And Canadian banks could find themselves playing less-prominent roles in underwriting syndicates if Encana gravitates toward U.S. and global banks.
“If the service firms don’t follow them, they’ll find local service firms to work with. That’s going to be true of lawyers, advertisers, financial-services firms," said Will Mitchell, professor of strategic management at the University of Toronto’s Rotman School of Management. “Because those are really heavily based on personal relationships.”
For lawyers doing work for Encana and other energy companies shifting their focus to the U.S., the impact could be a more gradual loss of lucrative corporate law work.
Encana is currently listed on both the New York and Toronto stock exchanges, meaning it already has securities filings obligations in both countries. However, lawyers say that once the company is incorporated in the U.S., that will change its corporate governance obligations – including fiduciary duties for its board members and management – and will likely require advice from lawyers with experience in the relevant U.S. jurisdiction.
For external legal counsel on many recent transactions, Encana has used Blake, Cassels & Graydon LLP as its Canadian adviser and Paul, Weiss, Rifkind, Wharton & Garrison LLP in the U.S.
When a head office leaves Canada, “it has broad ripple effects," according to Ms. Stimpson of Torys.
“For the redomiciled U.S. parent company, that will be the location of the prominent corporate, securities and advisory work,” she said. “Canada won’t be eliminated from the mix, as they will still require Canadian counsel for their Canadian assets and their TSX listing, but the Canadian role will be diminished.”
In raw financial terms, the business at stake is not immaterial. Since 2013, Encana has completed transactions – such as acquisitions, or issuing equity or bonds – with a combined value of US$28.4-billion, including acquired debt and liabilities, according to data from Refinitiv. Banks around the world, including those in Canada, don’t disclose the fees they collected on those 48 deals, but Refinitiv estimates they amounted to nearly US$400-million.
Swiss-based bank Credit Suisse has long had one of the strongest relationships with Encana, and U.S. giant JPMorgan Chase & Co. has been playing an increasingly prominent role in the company’s transactions in recent years. But Canadian banks have been among the largest beneficiaries of Encana’s fees: RBC Dominion Securities Inc., CIBC World Markets Inc. and TD Securities Inc. are each estimated to have collected more than US$50-million in fees over the seven-year span, according to Refinitiv. Scotia Capital Inc. and BMO Nesbitt Burns Inc. also claimed fees worth an estimated US$46-million and US$33-million, respectively.
With reports from Emma Graney in Calgary