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Doug Suttles of EnCana speaks to the media after the company announced him as the new president and CEO in Calgary, Alberta, in this June 11, 2013 file photo. Encana Corp, Canada's largest natural gas producer, said on November 5, 2013, it will cut about 20 percent of its workforce, slash its dividend, and focus future spending on just five regions rich in oil and gas liquids as it looks to move away from low-value natural gas production.

Todd Korol/Reuters

Encana Corp. spun off an oil sands producer four years ago and has been haunted by the decision ever since. Investors are wagering it has better results with a new plan to spin off a cash producer – one that could spawn a host of new junior energy companies.

As part of a series of tough measures announced on Tuesday aimed at improving performance, Encana CEO Doug Suttles laid out plans to spin off a new entity from its Clearwater Royalty business, which controls a spread of freehold lands in Alberta that is only slightly smaller than the state of New Jersey. The unit will take over the task of collecting royalties and fees.

Encana will launch an initial public offering by the middle of next year and retain a majority stake in the concern. By some estimates it will be worth more than $2.5-billion. The lands currently produce nearly 50 per cent natural gas and the rest split between oil and gas liquids. Royalty revenue in 2012 was $160-million.

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Mr. Suttles had already said the freehold properties were not being recognized in Encana's share price, despite the minimal capital requirements and steady returns.

"It is a unique asset and we think this is the best way to realize the full value of that asset to our shareholders," Mr. Suttles said during a conference call on Tuesday. "That was my judgement and that was also the judgement of the board."

The idea is to attract other energy companies to come in and spend their own money drilling up parts of the 2.1 million net hectares. The newly created firm will collect the cash and pay a large amount of it out to the shareholders.

"I think it's a good way to unlock some value," said John Stephenson, portfolio manager at First Asset. "Clearly it's a way to take some properties out that are somewhat marginal to the core portfolio. It's consistent with the new strategy, which is to focus on core areas. It would be good because they've suffered from having too much stuff that's not that material."

The deal that Manitok Energy Inc. signed with Encana on some of the Clearwater lands in October provides a look at how the new business is likely to work. Manitok committed to spending $106 million on nearly 15,000 hectares over three years.

The Clearwater plan may prove to be an entry point for other smaller firms and established management teams looking to start fresh.

The land spread was given to Canadian Pacific Railway by Ottawa in the 1880s in exchange for building the railroad to the Pacific. Onetime CP unit PanCanadian Energy had the oil and gas rights to the acreage when it merged with Alberta Energy Co. at the start of the last decade to form Encana.

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Given the state of the natural gas business, Encana was sorely in need of a rewrite of its game plan.

In 2009, Encana spun off its oil sands business as Cenovus Energy Inc. It gained a brief stock bump, but it ultimately lost the security of diversification in commodities as oil markets were recovering and natural gas – Encana's focus – was beginning a downturn from which it has yet to recover.

The shares climbed to around $36 on the Toronto Stock Exchange by the start of 2010, then sank gradually. They closed at $18.59 on Monday, but were up 4 per cent following Tuesday's developments.

Phil Skolnick, analyst at Canaccord Genuity, has run some numbers on the spin-off firm based partly on metrics applied to Freehold Royalties, which runs a similar business on its lands. granted by the King of England to the Hudson's Bay Co. in 1670.

Taking an average of values ascribed to reserves, royalty revenue and net acreage, Mr. Skolnick pegs the worth of the entity at more than $2.7-billion, giving a share value of $3.70.

Mr. Stephenson estimated a share value of $3.36, which in his view would be nearly double what the assets currently fetch within Encana.

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Encana still has some of its own developments on the royalty lands, partly within a joint venture with Toyota Tsusho Corp., the Japanese trading company. The two are developing coalbed methane under a deal signed 18 months ago.

An Encana official said the company had yet to hire investment banks to handle the IPO, though after a slow year for energy deals, the intitiative is expected to have no shortage of enthusiastic candidates.

With a file from Carrie Tait

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