CALGARY — — EnCana Corp., Canada's biggest energy company, is going back to its roots: as two smaller companies.
Seeking to unlock the value of its enormous asset base, the $65-billion company plans to split into separate oil and natural gas firms, a move that underscores the massive need for capital in an oil patch where development costs are escalating rapidly.
The move by EnCana is fired in part by sky-high oil and gas prices, which are prompting the company to join the race to develop unconventional resources like Alberta's oil sands and British Columbia's vast natural gas reserves. But rocketing prices and booming development have also fuelled massive cost inflation.
The two separate firms that will be formed by the EnCana split operate in the hottest areas of interest to North American investors, and also the most capital-intensive. EnCana hopes that each new firm will now be more able to focus on its respective core business, creating more economies of scale and resulting in more efficient operations overall.
EnCana's chairman of the board, David O'Brien, smiles during the company's annual general meeting of shareholders in Toronto April 22. (Mike Cassese/Reuters)
Two sides to EnCana
Integrated oil sands
Contains EnCana's oil sands operations in northern Alberta, its Canadian prairies natural gas production business and EnCana's stake in ConocoPhillips' Wood River, Ill., and Borger, Tex., refineries
- Daily production: 860 million cubic feet of gas, 102,000 barrels of oil.
- Reserves: 2.02 trillion cubic feet of natural gas, 827 million barrels of oil.
- Refining capacity: 226,000 barrels per day.
2008 cash flow forecast: $4.2- to $4.6-billion.
Employees: 2,000.
Natural gas
Spinoff firm will hold Canadian foothills gas assets and U.S. properties. It will retain EnCana's name and produce gas from its Bighorn, Greater Sierra and Cutbank Ridge resource plays in Canada. U.S. holdings include Jonah field in Wyoming, Colorado's Piceance Basin, and the East Texas and Fort Worth, Tex., fields.
- Daily production: 2.92 billion cubic feet of natural gas, 30,000 barrels of oil.
- Reserves: 11.28 trillion cubic feet of natural gas, 100 million barrels of oil.
- 2008 cash flow forecast: $7.9- to $8.2-billion.
- Employees: 3,500.
Reuters
EnCana Corp.
The move could increase pressure on other firms with diverse asset portfolios, such as Nexen Inc. or Talisman Energy Inc., to follow in EnCana's wake, triggering a swath of similar breakups in Calgary's oil patch.
"It's the right time to undertake the next step," said EnCana chief executive officer Randy Eresman at a press conference in Calgary.
"The current market environment is very robust, supported by the underlying strength in commodity prices. Our natural gas [portfolio] is very strong, and our existing and emerging plays hold great potential."
EnCana, formed in 2002 from a merger of PanCanadian Energy and Alberta Energy, has long been recognized as a leader in North American gas production.
Going against conventional thinking, the firm pioneered the development of "resource plays" — buying massive tracts of natural-gas fields in North America and then using technology and economies of scale to wring profits out of otherwise marginal assets.
The strategy has been wildly successful, catapulting EnCana to top dog amongst Canada's oil and gas firms in terms of production and market capitalization.
However, the company has also built up a substantial position in the oil sands, where it expects to produce 200,000 barrels of crude a day in 2012. EnCana feels investors haven't ascribed the worth to those assets that they deserve, resulting in the company's overall valuation lagging to those of more focused oil sands players like Imperial Oil Ltd.
Spurred by analysts, EnCana has long been rumoured to be considering outlandish ways of increasing value, including spinning off its different business units. In 2006, EnCana attempted to turn one-third of itself into an income trust, but the move was kiboshed by Ottawa's crackdown on the trust sector.
Through a court-approved plan of arrangement, EnCana will be split into two companies, temporarily named IntergratedOilCo (IOCo) and GasCo, in early 2009.
IOCo will focus on the development of EnCana's oil sands and U.S. refinery holdings, although it will also retain control of some of EnCana's maturing shallow gas fields.
IOCo's oil sands production, currently about 30,000 barrels of crude a day, will grow by up to 20 per cent over the next decade, said EnCana chief financial officer Brian Ferguson, who will lead the new firm.
Meanwhile, GasCo will retain control of the company's gas resource plays across North America. Mr. Eresman will become the CEO of GasCo, which is expected to retain the name EnCana Corp. EnCana shareholders will receive one share in each of the two companies.
While other companies will take a "wait and see" approach to see if EnCana's move pays off, any success would force them to look more closely at following suit, said David Doig, a Calgary-based analyst with Union Securities Ltd.
"If investors do buy into this, then there will be tremendous pressure on others to do it too," he said.
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