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EnCana rocked and rolled Two bomb attacks on sour gas pipelines in British Columbia; buffeting from markets forces postponement of company split Gary Park For Petroleum News
EnCana, one of North America’s largest oil and gas companies, has experienced a week it won’t look on with anything other than despair.
Citing the uncertain times, it shelved indefinitely plans to split the company into separate units to run its natural gas and oil businesses, an announcement that was wedged between two potentially deadly bombing attacks on sour gas pipelines in northeastern British Columbia.
Following quickly on a commitment to proceed with the corporate reorganization, despite global financial turmoil, it did a swift about-face as its market value nosedived from a peak of $75 million in May to barely $30 billion.
The Globe and Mail reported Oct. 10 that the rising costs of loans due to new interest rates and covenants, along with a shortage of lenders, would likely delay the creation of newly labeled Cenovus Energy to run the integrated oil operations (dominated by its oil sands projects), leaving EnCana as a pure natural gas producer.
EnCana Chief Executive Officer Randy Eresman said there was “too much uncertainty in global debt and equity markets to proceed with external approvals at this time.”
“We cannot predict when the appropriate financial and market conditions will return, but EnCana will be prepared to advance the proposed transaction when it determines the conditions are appropriate,” he said.
EnCana held $10 billion in long-term debt at the end of June, indicating Cenovus, with one-third of the assets, would be faced with arranging $3.3 billion in debt of its own.
Analysts: takeover possible In addition, Canaccord Adams analyst Richard Wyman told clients he “surmised the delay ... is based on concerns that the successor entities are each small enough to be susceptible to unwelcome takeovers.”
Terry Peters, an analyst at Canaccord Capital, had previously calculated that ExxonMobil, Shell, BP, Total and Chevron had a combined $65 billion in cash and a record of buying when oil stocks were out of fashion.
He pinpointed EnCana (either in whole or in part) as a takeover target along with Suncor Energy, Canadian Natural Resources, Talisman Energy and Nexen.
Wyman said the current commodity price environment suggests EnCana will put more emphasis on investing for return on capital than growth in 2009.
“EnCana is one of the lowest-cost operators in the industry, so its financial performance is reasonably resilient to natural gas price volatility,” he said.
Philip Skolnick of Genuity Capital Markets told the Globe and Mail EnCana has a smart management team that apparently “decided it doesn’t make sense to get rid of the synergies they have now with the cash flow of the combined company.”
Esther Mui, senior vice president at Dominion Bond Rating Service, said the company made the right move.
“They are more diversified, the market is difficult, and they don’t have a lot of financing needs in the next couple of years,” she told the Financial Post.
Valuation a concern When the split was unveiled in May, EnCana was certain it wasn’t receiving proper value on the stock market. At that time in New York it was heading towards $90 and there were no worries about negotiating the necessary debt to complete the split in December.
Robert Plexman, a CIBC World Markets analyst, said the right decision was made at the time when “valuation multiples, especially for high-growth natural gas exploration and development companies were at a premium and it made sense for EnCana to try and capture some of that.”
He underscored EnCana’s accompanying decision to hedge 2.5 billion cubic feet per day (or about 60 percent of its total production) at an average US$9.15 per thousand cubic feet for the 2009 gas year.
“EnCana typically likes to hedge about half of its production at about $8.50 per thousand cubic feet ... so, by my calculation, they’ve done exceptionally well here in locking in 62 percent of their production,” Plexman said.
Eresman also said EnCana is taking a “measured approach” in developing its 2009 budgets by maintaining “capital discipline” and being “even more focused on capital preservation” than usual.
Plexman interprets those comments as a sign that EnCana plans to slow down, but a company spokesman said that for now the company is on track to meet its guidance numbers and 2009 remains an unknown until the budgets are set.
However, the company tried to calm any anxieties among shareholders by noting that 78 percent of its outstanding debt is fixed-rate.
Upcoming debt maturities of $250 million in August 2009 and $200 million in August 2010 are modest alongside EnCana’s committed bank credit lines of about $4.8 billion, of which $2.7 billion was available at Sept. 30.
Even so, Michael Tims, chairman of investment dealer Peters & Co., said EnCana’s oil sands and its natural gas assets (because of short-lived reserves) require it to “keep spending in order to generate the necessary cash flow.”
In addition, the fluctuations in refining and marketing margins pose a challenge for investors to assess risk, Tims said.
Two explosions reported While grappling with one monumental decision, EnCana suddenly found itself in the international spotlight as the possible target of ecoterrorists in what the Royal Canadian Mounted Police said were attempts to damage “important Canadian infrastructure.”
The police believe two explosions along sour gas pipelines in British Columbia are tied to a letter sent to news media in the region demanding that oil and gas projects be shut down.
RCMP Sergeant Tim Shields said the two events appeared to be related and were being taken “very seriously,” to the point of involving Canada’s Integrated National Security Enforcement Team.
The role of INSET, according to the RCMP, is to “detect, prevent, disrupt and investigate terrorist targets and ultimately bring terrorists to justice prior to serious, violent, criminal acts being perpetrated in Canada and/or abroad.”
Letters sent to regional media outlets, including the Dawson Creek Daily News, set a deadline for “EnCana and all other oil and gas interests,” warning “we will not negotiate with terrorists, which you are as you keep endangering our families with crazy expansion of deadly gas wells in our home lands.”
EnCana said it had received no direct warnings of sabotage aimed at its facilities.
The second explosion left a small crater beneath the pipeline that carries 40 million to 50 million cubic feet per day of gas with a significant hydrogen sulfide content.
A small leak was “quickly contained by pipeline workers,” Shields said.
The blasts revived memories of oil patch bombings and vandalism in the 1990s, which resulted in almost two years behind bars for an Alberta rancher, Weibo Ludwig. He is now believed to live in northwestern Alberta, not far from where the British Columbia incidents took place.
Andrew Nikiforuk, who wrote a book on the Ludwig story, said that in the space of two years before the attacks by Ludwig, there were more than 600 acts of vandalism and industrial sabotage in the region, including six other bombings.
He said workers have died from exposure to sour gas and landowners have lost horses and cattle on both sides of the Alberta-B.C. border.
Tensions have been high over recent years as many landowners have been forced to allow access to their properties by oil and gas companies which own the subsurface rights. Gwen Johansson, president of the Custodians of the Peace Country Society, said the interests of landowners must be recognized, “otherwise if you back people into a corner they have nowhere to go.”
Her call for legislation to provide a dispute mechanism was rejected by John van Dongen, British Columbia’s Solicitor-General and Minister of Public Safety.
“This is a totally inappropriate, totally unacceptable, totally despicable criminal act,” he said, suggesting there were other ways to make a case for changes to land-use and energy industry decisions.
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