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Eresman quits, Encana stays course Company says no plans to change strategy; hurt by weak gas prices, growth in North American supply, after spinning off Cenovus Gary Park For Petroleum News
Any corporate statements issued after the stock markets close on Friday arouse immediate suspicions.
It was no different Jan. 11 when Encana startled the industry by announcing that Chief Executive Officer Randy Eresman was retiring, effective immediately, after seven years at the helm and 35 years with the company and its predecessors.
That put Eresman in the same recent category as two of his peers — Talisman Energy’s John Manzoni who was sent packing four months ago and Nexen’s Marvin Romanow, who made a hurried departure after only two years on the job.
For all three, the core problems were floundering corporate balance sheets and weakened share prices.
Once one of North America’s top natural gas producers and once the market-cap leader among all publicly traded Canadian companies, Encana has paid a heavy price for untimely strategic moves.
It spun off oil sands and liquids assets into Cenovus Energy at a time when its shares traded around the mid-$30s, $15 above the latest range, counting on natural gas to carry it to new heights, but not counting on the rapid emergence of shale gas.
No changes planned While analysts scratched for a deeper meaning in the departure of Eresman, Encana said it has no plans to materially alter its previously announced strategy or 2013 guidance.
Company spokesman Jay Averill told Petroleum News that when the final 2012 year-end results and 2013 budget are released on Feb. 14 they will show that Encana plans to continue with the “current working targets.”
Those have indicated 2013 production of 2.9 billion to 3.1 billion cubic feet per day of gas, a doubling of oil and natural gas liquids volumes to 60,000-70,000 barrels per day and divestitures of $1 billion-$1.5 billion after unloading $4.6 billion over the past two years.
Over the past two years, gas output has dropped to 3.3 bcf per day in 2011 and 3 bcf per day in 2012.
Capital spending has been tentatively earmarked at $4 billion to $5 billion this year compared with $3.5 billion in 2012 and $4.6 billion in 2011.
Averill said it is “important to note that with the completion of the Duvernay joint venture (with PetroChina) Encana has exceeded the goals we set for the end of 2012. We are in a very good position financially going into 2013.”
“This gives us the ability to be very selective with joint venture transactions, or strategic divestitures we may complete in 2013,” he said.
In his parting statement, Eresman, aged 54, said that during his 35 years with Encana and its predecessors, the last seven as CEO, “we created and captured many opportunities and together we also overcame many challenges.”
Opportunities and challenges The question now doing the rounds is what opportunities are available for Encana to overcome its current set of challenges and whether an international company hungry for gas supplies to back LNG projects might stage a takeover bid.
Andrew Potter, an analyst with CIBC World Markets, said in a note that Encana’s appeal to would-be bidders “relates primarily to their vast feedstock of gas opportunities,” although he gave a rating of only 30 percent-40 percent to a takeover move because of Encana’s size.
BMO Nesbitt Burns analyst Randy Ollenberger said in a note that Eresman’s departure will bring a “fresh set of eyes that might identify some additional opportunities. I actually anticipate some additional transactions in 2013, (such as) joint ventures in Canada.”
Phil Skolnick, an analyst with Canaccord Genuity, said any potential buyer would likely have to be Canadian-controlled because of Canada’s new takeover standards for foreign state-owned companies.
He recommended that “investors use any large share price surge on takeover speculation as a profit-taking opportunity.”
Chasing JVs, divestitures Eresman’s overriding five-year objective had been to double per-share output by 2015 by raising production from Encana’s vast stable of unconventional gas resources to 6 bcf per day.
But the company has spent the last two years retreating from that goal and chasing joint ventures and divestitures while trying to regain a presence among oil and natural gas liquids producers.
Some analysts who did not want to be named said Eresman had sacrificed too much of Encana’s value by negotiating joint ventures in a low-price environment.
The stand-out example was December’s $2.18 billion deal to pass a 49.9 percent non-controlling interest in 445,000 acres of the fast-emerging Duvernay formation in west-central Alberta to PetroChina — the consolation prize after a failed $5.4 billion joint venture with PetroChina for Montney unconventional gas assets in British Columbia.
Descent started with Cenovus spinoff Toppled from its perch as a market-cap leader among all publicly traded Canadian companies to 31st, Encana started its descent three years ago when it spun off Cenovus Energy as a pure play oil sands player before getting sideswiped by weak gas prices and the flood of new gas supplies across North America. At the time, Encana had also started work on a new 59-storey, C$700 million office tower, the tallest in Calgary.
In late 2011, Laura Lau, a Toronto energy fund manager, said what was on many minds by suggesting Eresman had shifted his strategy “four or five times in the last year (getting) close to capitulating on most of his plans.”
In a rare break from his normally stoic style, Eresman fired back. “We’re not really changing our strategy. We’re altering it to the reality of the market.”
And that remains the challenge facing the one-time giant.
For now, a company director Clayton Woitas will serve as interim chief executive officer until a permanent replacement is found.
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