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EnCana's Long-Awaited Split a Go

EnCana Corp.'s share price shot up by more than 7.5% by midafternoon Friday after the company relaunched plans to split into two energy companies, one a North American-focused unconventional natural gas producer, the other an integrated oil company.

The proposed reorganization was launched publicly in May 2008, but following the collapse in global financial markets the Calgary-based producer shelved the strategy last October (see NGI, Oct. 20, 2008; May 19, 2008).

Late Thursday the Calgary-based producer said the revamp was a go, which encouraged investors to trade more than 5.8 million shares by midafternoon Friday -- almost triple EnCana's normal trading activity in a day. At 2:45 ET Friday EnCana's share price had risen more than $4.10/share to trade at around $58.75.

CEO Randy Eresman, who presided over a conference call with the management team on Friday, told investors that EnCana was in better shape today than it was when it first launched the dual strategy last year. The global market meltdown, he said, had forced the company to refocus to become more efficient.

"We have seen improved stability in global equity markets," Eresman said. The company is "cautious about the speed and volatility of a recovery, but we believe we've experienced the worst of the economic downturn..."

That's not to say that EnCana is basing its relaunch on a recovery in gas prices anytime soon.

"With respect to prices, we continue to see significant weakness," said Eresman. "Gas pricing softness is expected to continue through the remainder of the year and into 2010." Oil prices "are closer to our long-term expectation, but the same cannot be said for current natural gas prices. So far, 2009 has been very challenging from a natural gas standpoint, but our cost controls, efficiencies and hedging practices have served us well."

Based on government and analyst forecasts that predict growing North American gas volumes from unconventional resources, EnCana's long-term forecast for New York Mercantile Exchange gas prices is $6-7/MMBtu, Eresman said.

"The natural gas business will continue to be about lower costs and maximizing margins," he told investors. "We have an increased understanding of low-cost basins, such as the Haynesville Shale and the Horn River" (see related story). EnCana doesn't view current gas prices "as an impediment to this transaction."

If gas prices going forward average $6-7, "we can physically grow by about 10% a year and still have enough cash flow to buy back 1-2% of our shares annually," said Eresman.

Under the board-approved plan, EnCana, or "GasCo," would be a pure-play gas producer with a portfolio of gas shale and resource plays across North America. Cenovus Energy Inc., the integrated oil company, would be focused on enhanced oil production and refineries and act as an "underlying foundation" for oil and gas resource plans. The transaction is scheduled to be completed by the end of November.

Once the transaction is completed, EnCana (GasCo) would produce about 2,815 MMcf/d, with proved reserves of 11,822 Bcf. EnCana's land position would approximate 15.6 million net acres, including around five million developed acres. Estimated cash flow for 2009 would be $6 billion.

Cenovus, with 4.5 million net acres of developed acreage and 3.6 million net acres of undeveloped land, would produce around 820 MMcf/d; oil and natural gas liquids production would be 11,000 b/d (11,490 MMcfe/d). Operating cash flow for 2009 is estimated at $3.5 billion.

EnCana's "extensive work in the past year has helped reduce the risks associated with the transaction," said Eresman, who would continue to lead EnCana. "We have received tax rulings from the Canadian and U.S. federal tax authorities that confirm, subject to the terms of the rulings, that the transactions will not be taxable from a corporate and shareholder perspective. We have secured committed financing for Cenovus that will support its independent business plan. We have acquired and built much of the infrastructure for Cenovus's information technology systems.

"The leadership teams have been identified and employees have been assigned to new or continuing roles in each of the proposed companies. Having completed this foundational work, and with the return of financial market stability, we are proceeding with this value-creating transaction in a prompt and prudent manner."

EnCana (GasCo) is to be chaired by David P. O'Brien, while Eresman keeps his CEO and president titles. Sherri Brillon, now EnCana's executive vice president (EVP) for strategic planning and portfolio management, was named CFO. Mike Graham, EnCana's EVP for the Canadian Foothills Division, is to become president of the Canadian Division. Jeff Wojahn, EVP of the USA Division, keeps his title. Bill Oliver, EVP of Canadian Gas Marketing and Power, was named chief corporate officer. Bob Grant, EVP of business development, takes over as EVP of corporate development, while Eric Marsh, EVP of corporate supply management and special projects, becomes EVP of governmental affairs and special projects. Bill Stevenson, now vice president and controller, was named EVP and chief accounting officer.

Cenovus will be chaired by Michael A. Grandin. Brian Ferguson, now EVP and CFO of EnCana, takes over as president and CEO of Cenovus. Ivor Ruste, EnCana's EVP and chief risk officer, was named CFO.

Under the proposed transaction, EnCana common shareholders would retain their shares and receive one Cenovus common share for each EnCana share. The initial combined dividends of the two companies would be about equal to EnCana's current annual dividend of $1.60/share.

"EnCana's (GasCo) portfolio of prolific gas resource plays will include our coalbed methane in central and southern Alberta, the Bighorn Deep Basin play in Western Alberta, Cutbank Ridge and Greater Sierra plays in British Columbia, Jonah play in Wyoming, significant Piceance Basin plays in Colorado, the Barnett Shale play in Fort Worth and Deep Bossier play in East Texas," said Eresman.

"In addition to these established resource plays, our teams have recently achieved some promising exploration results in a number of North American shale plays, such as Horn River in British Columbia and Haynesville in Louisiana. These and other emerging plays have the potential to add significant depth to the company's strong portfolio of natural gas assets."

EnCana has hedged two-thirds of expected 2009 gas production, or about 2.6 Bcf/d, through October at an average New York Mercantile Exchange (Nymex) equivalent price of $9.13/Mcf. As of Sept. 8, the company had established fixed price hedges on about half of expected 2010 natural gas production, or about 2 Bcf/d, at an average Nymex equivalent price of $6.08/Mcf for the gas year, which runs from Nov. 1 to Oct. 31, 2010. EnCana also has 27,000 b/d of expected 2010 oil production hedged at an average fixed West Texas Intermediate crude price of $76.89/bbl.

The transaction is expected to have "minimal impact" on EnCana's employees, operations, suppliers, business partners and stakeholders. Each company will maintain separate energy marketing operations.

"We recognize reorganizations may cause uncertainty for staff, contractors, our business partners, suppliers and our stakeholders in the communities where we operate," said Eresman. "Through this transition period, we will work diligently to make these changes as seamless as possible. We are not contemplating any layoffs. In fact, with the promising potential of these two companies, we expect continued employment opportunities ahead in both companies. In past periods of organizational change, our staff has displayed focus and dedication while creating thriving new organizations and we are confident EnCana (GasCo) and Cenovus will continue that practice."

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