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December 2009

Vol. 14, No. 49 Week of December 06, 2009

‘Possible … probably not likely’

EnCana chairman, execs play down takeover risks as Canadian independent goes its separate ways; argue share value best protection

Gary Park

For Petroleum News

A few voices of dissent were effectively stifled and an overwhelming 99 percent-plus of shareholders set the oil and natural gas parts of EnCana on separate directions, with executives playing down any suggestion that the assets they control are now more vulnerable to takeover.

The reorganization, which has also gained court approval, splits EnCana into two new entities — a pure-play gas producer that will keep the EnCana name and an integrated heavy oil producer called Cenovus.

EnCana Chairman David O’Brien acknowledged the odds of takeover bids for either of the freshly minted companies is “certainly possible, but probably not likely.”

Speaking at a special Nov. 25 meeting of shareholders in Calgary, he said that creating “more focused companies … should over time result in a much better share price for each of the constituent parts than the former EnCana.”

“If that is indeed the case, there’s no better protection against a takeover than a fully valued share,” O’Brien said in response to a handful of objecting investors.

Eresman: ‘ideally positioned’

Randy Eresman, who will retain the chief executive officer’s position with the new EnCana, said the two companies are “ideally positioned for the future.”

“Fortunately, we’re launching EnCana as one of the lowest-cost natural gas producers in North America,” he said. “We’ve got exposure to all of the plays that are actually causing the value of natural gas production we’re seeing today.”

He conceded that EnCana is more exposed to uncertain gas prices than many of its gas-weighted peers in the United States, such as Chesapeake Energy and EOG Resources, but insisted his company’s downside risk is sheltered by a lower cost structure.

While not disputing claims that persistently low gas prices will act as a drag of the value of EnCana, Eresman said: “We think over time that this will clear itself up and the best producers at the lowest cost will survive.

“There will be continued volatility. The markets have difficulty balancing themselves all the time.”

He expects Nymex gas futures to rise over the next year to about $6.50 per thousand cubic feet from today’s $5 range.

Strong heavy oil market

In contrast, Cenovus, which has a joint production-refining venture with ConocoPhillips, enters one of the strongest heavy oil markets on record.

With low price differentials between light and heavy oil and declining output from Venezuela and Mexico, it is positioned to seize a healthy market share.

Brian Ferguson, chief executive officer of Cenovus, said his company is targeting annual production growth of 15-20 percent from the assets it now holds.

He said that “from the moment of its creation, we expect Cenovus to be an industry leader,” to compete against oil sands leaders Suncor Energy, Imperial Oil, Royal Dutch Shell and Canadian Natural Resources.

Cenovus also plans to unload about $500 million worth of gas assets to help finance the development of about 40 billion barrels of oil sands resources.

One shareholder at the No. 25 meeting argued the split turns one strong corporation into two weak ones and another raised concern that one or both of the new companies could be taken over — with EnCana seen as an especially ripe target for gas acquisitors — with the loss of Canadian headquarters.

Analysts generally upbeat

Analysts are taking a generally upbeat view of how things will unfold.

Jim Osman, chief executive officer of English-based Spinoff Report, said in a special report that new EnCana will benefit as investors gain a “clearer recognition of its impressive production growth, the re-rating of the stock and its attractive resource base.”

Cenovus will “allow investors to equally recognize and acknowledge its high cash flow generating capacity and strong refining capability, together with the fact that it’s a low-cost producer.”

Kam Sandhar, with investment dealer Peters & Co., rated each company’s shares as “sector outperform,” setting a US$38 target for EnCana and C$30 for Cenovus.

“We continue to believe that EnCana and Cenovus will rank at the top of their respective peer groups,” Sandhar said.

Martin Molyneaux, research director at FirstEnergy Capital, said the split makes sense “if you can clearly see that two-plus-two equals five,” predicting that a year from now the decision will be seen as a “brilliant move” as the market rewards the new companies with higher multiples as new strategies are developed and enacted.

Phil Skolnick, an analyst with Genuity Capital markets, doubts that either company will become a takeover target in the short term, suggesting that Cenovus has a “natural white knight” in its joint-venture partner ConocoPhillips, which could fend off hostile bidders.






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