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Vol. 14, No. 39 Week of September 27, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

The big Canadian split

EnCana reorganized into two companies; challenged by weak gas prices

Ray Tyson

For Petroleum News

EnCana’s decision to split into two independent publicly traded energy companies, propped up by a multibillion dollar loan for one of the new companies, supports positive outlooks for troubled credit and debt markets, as well as for improvement in natural gas prices, at least from EnCana’s viewpoint.

The plan to divide Calgary-based EnCana into separate companies — Cenovus Energy Inc. and EnCana (GasCo) — was initially announced in May 2008 and then postponed until the following October because of the unprecedented meltdown in world financial markets.

“We have seen improved stability in the equity and debt markets,” Randy Eresman, EnCana’s president and chief executive officer, said during a Sept. 11 conference call explaining the primary reason why EnCana decided to resurrect the split.

The deal is relatively uncomplicated and what investors might expect: create “two highly focused energy companies” that would strengthen long-term shareholder value. Under terms of the transaction, EnCana investors would receive one share each in Cenovus and EnCana (GasCo). The transaction is expected to close Nov. 30, pending shareholder approval.

Cenovus long-term growth

Just how the North American energy sector will play out is anybody’s guess. But with oil prices improving, Cenovus and its enhanced oil recovery program, refineries and oil-dominant plays, would become “the primary source” of long-term growth, EnCana said. To support this effort, EnCana was able to obtain $3 billion non-revolving, 364-day, bridge financing from RBC Capital Markets to help finance the $3.5 billion to be paid to acquire the assets.

To help finance and streamline the deal, Cenovus likely will sell off non-core assets in its first couple of years as a standalone company, raising up to $500 million a year, Brian Ferguson, EnCana’s chief financial officer and designated president and chief executive officer of Cenovus, said during the conference call. However, Cenovus’ first objective is to focus on developing its vast bitumen resources, which could launch the company into double-digit growth, he added.

Gas focus for EnCana (GasCo)

In contrast, the long-term outlook for EnCana (GasCo), characterized by EnCana as a “pure-play natural gas growth company,” is far more uncertain, given the current North American glut in natural gas production, spurred by unfolding shale plays in both Canada and the United States, and the resulting weakness in gas prices. Roughly 95 percent of the new EnCana’s total production and reserves would be from natural gas.

“So far, 2009 has been a very challenging year from a gas pricing standpoint,” Eresman conceded, noting that EnCana’s gas production would have been “quite a bit higher” had the company not “restricted” daily volumes of 300 million to 400 million cubic feet due to low prices.

“Although we believe that we are likely near the bottom of the market, we expect to continue to see pricing softness through the remainder of the year and going into 2010,” Eresman said.

He added: “Recognizing that North America natural gas is both abundant and more affordable due to the emergence of shale plays, we are now forecasting our long-term New York Mercantile Exchange natural gas price in the $6 to $7 range.”

However, EnCana said it has at least partially protected itself from low natural gas prices by hedging about 50 percent of its expected daily production at a little more than $6 per thousand cubic feet through the end of October next year. Moreover, EnCana prides itself as a low-cost producer and has managed to reduce its overall debt to $8.2 billion, 19 percent below the debt level when the company first announced its plans to split last year.

“So we don’t view the current pricing environment as an impediment to proceed with the transaction,” Eresman said.

To help move the overall deal along, in addition to securing a handsome loan for Cenovus, EnCana has in hand tax rulings from both Canadian and U.S. authorities that confirm that the transaction would not be taxable “from a corporate or a shareholder perspective.”

Split along operational lines

There also is little doubt that EnCana brings a diverse and envious asset base to the reorganization, which would be divided along operational lines, with two-thirds of production and reserves going to EnCana (GasCo) and one-third to Cenovus, the company said. EnCana’s second quarter natural gas and oil production remained flat at 4.6 billion cubic feet equivalent per day compared to the second quarter of 2008.

Its Canadian Foothills and U.S. operating divisions would form “the pure-play natural gas company,” anchored by a land base of more than 15 million acres. EnCana (GasCo) would control major gas resources including the Big Horn Deep basin play in Western Alberta, the Cutback Ridge and Greater Sierra resource plays in British Columbia, the Jonah play in Wyoming, the Piceance basin plays in Colorado, and the Barnett shale and Deep Bossier plays in East Texas.

Additionally, the company has achieved promising exploration results in a number of North American shale plays, such as Horn River in British Columbia and Haynesville in Louisiana.

“These and other emerging plays have the potential to add significant depth to the company’s strong portfolio of natural gas assets,” Eresman said.

Cenovus is billed as “a premier integrated oil company,” driven by development of enhanced oil production projects in Canada such as Foster Creek and Christina Lake, along with key properties at Pelican Lake and Weyburn. Cenovus also would hold oil lands on 10 other projects covering reservoirs located across the heart of Western Canada’s Athabasca oil sands region. EnCana estimates its 1.4 million acres of leases contain more than 40 billion barrels of original bitumen in place. Additionally, Cenovus would take over interests in several EnCana refineries.

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