Clearwater numbers lend credence to revival at Encana

Share

The initial public offering of Encana Corp.'s Clearwater Royalty business may be worth much more than investors initially figured, according to a new assessment.

The spinoff of the unit, part of a major restructuring at Canada's biggest gas producer, is aimed at raising capital for redeployment to other operations while allowing Encana to garner revenue through cash payouts to shareholders. It is expected by around the middle of the year.

Phil Skolnick, analyst at Canaccord Genuity, said Clearwater could initially have an enterprise value of $3.5-billion (U.S.), up from his November estimate of $2.7-billion, based on market valuations afforded to a pair of companies with similar revenue sources.

The Clearwater Royalty business is composed of 4.6-million net acres of Alberta land, from which Encana produces revenue from its working interests there, as well as royalties collected from other companies operating on it. Encana will retain a majority stake in the new business.

The lands currently produce nearly 50 per cent natural gas and the rest is split between oil and gas liquids. Royalty revenue in 2012 was $160-million.

Mr. Skolnick said Clearwater should trade at a premium to Freehold Royalties Ltd., which generates income from its own oil and gas royalty interests. It may fetch a discount to Franco-Nevada Corp., which has both energy and gold interests.

Based on their multiples and estimated 2015 production growth in a range of plus 10 per cent to minus 10 per cent, he pegged Clearwater's enterprise value at $2.8-billion to $4.2-billion, with $3.5-billion at the mid-point.

With that, as well as increasing investor interest in Canadian natural gas stocks following a frigid winter that lifted gas markets, Mr. Skolnick raised his 12-month target for Encana to $22.50 (U.S.) on the New York Stock Exchange.

It closed at $21.78 on Monday, having climbed 23 per cent since chief executive Doug Suttles explained the company's new strategic plan in early November. Much of the stock gain likely reflects expected value from Clearwater, said Mr. Skolnick, who maintains his "hold" rating despite the increased target.

"With respect to Clearwater, we expect in its own right to receive high demand for the IPO," he wrote.

Encana's new strategy features a focus on five major operating areas rich in natural gas liquids and oil, as well as a host of asset sales. The latest example of the latter was the $1.8-billion sale of its Jonah gas field in Wyoming to TPG Capital, a private-equity firm, in late March.

The next steps in the Clearwater IPO process are the appointment of managers and a board of directors, as well as the filing of the prospectus.