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Encana's Canadian exit could have 'unintended consequences': CIBC

Encana offices Parachute, Colorado, December 10, 2014. The economy of Parachute, with a current population of approximately 1000 people, was devastated when thousands of workers lost their jobs on "Black Sunday" in 1982, after Exxon terminated the Colony Shale Oil Project. The current rise of hydraulic fracking in natural gas retrieval has given a cautious hope to the town's inhabitants, who know that market demand brings both boom and bust. Picture taken December 10, 2014.  REUTERS/Jim Urquhart (UNITED STATES  - Tags: ENERGY BUSINESS)
Encana offices Parachute, Colorado, December 10, 2014. Picture taken December 10, 2014. REUTERS/Jim Urquhart

Encana (ECA.TO)(ECA) has justified its plans to wipe away its Canadian identity and shift its headquarters to the United States with expectations for better access to stateside investment. But one CIBC analyst warns the attempt to boost the company’s share price may not go as planned.

The Calgary-based oil and gas company with roots dating back to Canada’s start as a country announced plans on Thursday to move its headquarters to the United States and ditch its Canadian-sounding name in favour of Ovintiv.

CEO Doug Suttles said re-domiciling south of the border would expose the company to “increasingly larger pools of investment in U.S. index funds and passively-managed accounts, as well as better align us with our U.S. peers.”

The announcement was widely seen as the latest blow to Canada’s battered energy sector and a reaction to the re-election of Prime Minister Justin Trudeau, who many in the oil patch have come to view as hostile to their business interests.

Suttles has denied that politics played into the decision to cross the border, standing by his claim that Encana will “leave no stone unturned” in its effort to build value for shareholders.

While Encana has made a series of moves to boost its U.S. focus, most notably the US$5.5-billion acquisition of Oklahoma’s Newfield Exploration, CIBC World Markets analyst John Morrison questions the premise that Encana has suffered as a result of its Canadian headquarters.

“We find ourselves a bit perplexed as to the path that Encana is taking. While we view there to be some merit to the company re-domiciling in the U.S., we do not believe the fact that Encana has been a Canadian-headquartered entity has led to any material share price underperformance,” he wrote in a note to clients on Thursday.

Encana said shareholders will vote on the proposed name change, share consolidation, and U.S. domicile in early 2020 at a special meeting. Morrison questioned what the company will achieve through these plans.

“These actions rarely create the desired outcomes for which they are intended,” he wrote. “We believe the path to longer term share price outperformance will be paved with continued execution, free-cash-flow generation/harvest and a decent passage of time. And any steps that attempt to expedite the process in earnest might end up proving to deliver unintended consequences.”

Morrison downgraded Encana shares to “underperformer” on Thursday, and cut his price target to $4 from $5 previously.

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