Randy Eresman just put the needs of EnCana Corp. shareholders ahead of what's best for the management team at Canada's biggest energy company.
After years of defending the fact that EnCana straddled two very different worlds with its mix of oil sands and natural gas, Mr. Eresman is busting up his company. He's providing a high-octane boost to the stock price. The market likes pure plays, and loves takeover targets. And that's where management wakes up this morning facing a whole new set of challenges.
EnCana, a $64-billion company, was probably too big and too strategically important to be acquired. Its two offspring, however, deserve a takeover premium. Both will be far easier for a reserve-hungry global energy rival to snap up.
It has long been conceded that EnCana's structure weighed heavy on its stock price – the restructuring announced yesterday has been debated internally for at least three years. Think back to the slump in natural gas prices. When that commodity was in a funk, EnCana lagged peers such as Canadian Oil Sands, which boasted a larger exposure to oil.
But Gwyn Morgan, Mr. Eresman's strong-willed predecessor, favoured balancing risks. He embraced the more predictable cash flow that came with a diversified energy company. Cash gleaned from EnCana's gas sales, for example, could feed capital-hungry oil sands projects.
Mr. Eresman, a Medicine Hat, Alta., native who signed on with an EnCana predecessor company 28 years ago, is in his own quiet way a far more revolutionary CEO.
He embraces the logic that investors are best served by a standalone gas play that ranks among the world's largest, and an oil sands play with huge refinery capacity. Each attract far larger followings and far better market valuations than an energy conglomerate.
With a large portion of EnCana acquired after the investor-friendly bust-up of Canadian Pacific, it's not hard to guess where Mr. Eresman gained this faith. The other thing to recall from the CP breakup is that four of the five spinoffs were subsequently acquired.
Even if the EnCana units stay independent, breaking up doesn't make life easier for Mr. Eresman, who will run a gas company that keeps the EnCana name, and the rest of his team.
EnCana chief financial officer Brian Ferguson will soon be running an oil sands company that, while large, will face a higher cost of capital, and diminished access to cash from internal sources – the gas operations. Job No. 1 has got to be a new name for this division: Investment bankers have hung the unfortunate moniker IntegratedOilCo. or IOCo on it.
But looking ahead, all these EnCana managers know that their jobs are at greater risk, as there's a very real chance the divisions will be bought.
Buyers will certainly circle. Exxon Mobil and BP rank No. 1 and 2 in North American natural gas, and both have the cash and ambition to make a move.
The oil sands assets will be even more attractive, as the new company will be snack-sized, with about a third of EnCana's assets. The list of potential buyers starts with ConocoPhillips, EnCana's partner on heavy oil refineries.
Mr. Eresman is doing the right thing for EnCana shareholders, and should be applauded for his nerve. But no one's job at EnCana got easier as a result of yesterday's breakup. And it's possible, even probable, that the end result of splitting up EnCana will be the acquisition of its offspring.
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