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EnCana chases market value Big independent opts to split oil, natural gas, dropping from top gas rung; rest of industry takes ‘wait-and-watch’ attitude Gary Park For Petroleum News
just six years ago, when it was created from a merger of Alberta Energy Co. and PanCanadian Petroleum, EnCana had a grand dream to become a “global super-independent.”
But political risks in places such as Ecuador soon put paid to that notion and the big Canadian firm beat a rapid retreat to its home base in North America, not that it gave up on taking a chance.
In fact, EnCana caused heads to spin by turning its attention to unconventional plays — the gas resource prospects strung along the Rocky Mountain chain in Canada and the U.S. and the Alberta oil sands.
Supported by an impressive land base, it proclaimed the virtues of applying new technologies and economies of scale by drilling thousands of wells to extract gas from what were viewed by others as marginal prospects.
This essentially manufacturing operation has propelled EnCana to the top of the heap — making it Canada’s largest corporation and North America’s leading gas producer.
Frustration with market treatment But, like so many of its peers, EnCana has become frustrated with its treatment on the markets, deciding that its diversified portfolio has been a drag on stock prices.
Its first attempt to capture greater market value was stymied by the Canadian government when it attempted to spin off about one-third of its assets into an income trust — a ploy that was partly responsible for the government’s decision to start taxing trusts like regular corporations in 2011.
Plan B, a term EnCana won’t use, was rolled out on Sunday, May 11 — now jokingly referred to in Calgary as the Mother of all Mother’s Days.
In essence, EnCana is seeking shareholder, regulatory and court approval to divide its assets into two entities — one a pure-play gas company (currently dubbed GasCo but destined to retake the name EnCana) and the other an integrated oil company (titled IOCo, but scheduled for something more intelligible before the reorganization is completed in early 2009).
EnCana Chief Executive Officer Randy Eresman will head the gas company and Brian Ferguson, currently chief financial officer, will take the reins in the oil company.
Who will get the top floor in EnCana’s new 59-story head office, due for completion in 2010, is not being revealed.
Gas company will take two-thirds But Eresman light-heartedly noted that the oval-shape of the building means there is no corner office.
He can probably afford to play the jokester since the gas company will clearly claim the major spoils.
It is expected to have two-thirds of EnCana’s current market capitalization of $70 billion.
On a pro forma basis, GasCo is forecast to have gas production this year of 1.66 billion cubic feet per day in the United States and 1.26 bcf per day in Canada, with proved reserves of 6 trillion cubic feet in the U.S. and 5.27 tcf in Canada.
Net land holdings are 5.1 million acres (developed) and 11.3 million acres (undeveloped), creating a drilling inventory of 26,000 wells, and proved reserves are 11.28 tcf of gas and 100 million barrels of oil and natural gas liquids.
Forecast operating cash flow for GasCo this year is $7.9 billion-$8.2 billion and the payroll will be about 3,500.
New company would cede top spot But, in turning over 860 million cubic feet per day of gas production to IOCo (which expects to need 400 million cubic feet per day by 2016 to fuel the extraction of 400,000 barrels per day from the oil sands), EnCana has ceded the top spot among North American gas producers and has even slipped to second in Canada behind Canadian Natural Resources on a barrels of oil equivalent basis.
Using 2007 numbers, Canadian Natural produced 609,232 boe per day compared with 515,000 boe per day by the gas company, while the new oil company will occupy 10th place in the Canadian rankings at 245,000 boe per day.
In addition to its gas output, the oil company will pump 102,000 bpd of oil and natural gas liquids from proved reserves of 2.02 tcf of gas and 827 million barrels of oil and liquids. It will also have 4.5 million developed acres and 3.9 million undeveloped acres.
IOCo’s predicted cash flow this year will be $4.2 billion-$4.6 billion and the workforce will be about 2,000.
IOCo will take over EnCana’s place in the year-old oil sands joint venture with ConocoPhillips, including the half share in 226,000 bpd of refinery capacity.
ConocoPhillips approval not required Ferguson made it clear that no approval for the corporate changes was required from ConocoPhillips and IOCo is “free to grow all of its assets whether they are inside the joint venture or not.”
One of those assets is the wholly owned Borealis oil sands lease, estimated at up to 3.4 billion barrels of resources and scheduled to come on stream at 35,000 bpd in 2012, building to 100,000 bpd by 2018.
Eresman said GasCo is expected to grow a “littler faster over the short-run” in the U.S., exploiting its Jonah (Wyoming), Piceance (Colorado), Fort Worth and East Texas plays.
He said the final resolution of the Alberta royalty dispute could see the company revive development of its Big Horn Deep basin play in northwestern Alberta.
Otherwise the best Canadian bets are the established Greater Sierra and Cutbank Ridge areas in northeastern British Columbia and the Chinook coalbed methane play in central Alberta.
The big prize on the horizon is tied to exploration success in the shale gas plays of the Horn River basin in British Columbia and Haynesville in Louisiana, which EnCana is confident will add significant depth to its assets.
Two-pronged fallout potential The fallout from the planned downsizing is two-pronged: Has EnCana opened the door to takeover moves for the new entities and has it put pressure on similar Canadian companies to take the same route?
Takeover talk is moderated by the knowledge that GasCo and IOCo will both be substantial enterprises, limiting the number of potential buyers. However, both ExxonMobil and BP have the cash and the desire to scoop up more gas interests and ConocoPhillips, given its place in the joint venture, may see value in taking over the operation.
Even so, Eresman noted that the new companies will have shareholder rights plans, allowing them to stall any offers while they examine other alternatives and seek an improved bid.
What it means for other diversified Canadian companies (those with conventional oil, oil sands and gas holdings) will depend on the market response to EnCana’s strategy and shareholder pressure.
For now, the betting is concentrated on Canadian Natural Resources, which comes into play later this year by launching its 110,000 bpd Horizon oil sands project on top of its key role as a Canadian gas producer and its array of international operations; Husky Energy, which has its foot in an almost identical set of camps; and Nexen, widely talked about as a candidate for breakup. Petro-Canada’s name has also been tossed into the ring. But Talisman Energy, despite feeling its assets are undervalued on the market, is viewed as a longer shot because it has stayed out of the oil sands.
Mike Tims, chairman of investment dealer Peters & Co., said the major deterrent for companies contemplating a breakup is that they would expose themselves to commodity price risk.
Terry Peters, an analyst at Canaccord Adams, said the prospect of splitting off various components for companies such as Canadian Natural, Talisman and Husky is reduced because those companies intend to use future oil sands cash to fund other parts of their operations.
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