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EnCana Now a Takeover Target?

December 7, 2009
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Calgary-based EnCana Corp. last week completed its transaction to split into two distinct energy companies, but some wonder whether the pure-play natural gas producer now is a mouthwatering morsel for a thirsty oil major.

Shareholders in late November voted overwhelmingly in favor of the transaction, with more than 99% approving it (see NGI, Nov. 30), and to complete the transaction the Court of Queen's Bench of Alberta officially gave its stamp of approval. The split cuts EnCana nearly in half, with both companies to focus on unconventional resources.

EnCana takes almost all of the natural gas assets, spread across Canada and the Lower 48 states, with prospects in all of the big shale basins, in the Rocky Mountains and in Alberta's coalbed methane fields. Cenovus Energy Inc., is an integrated producer, takes all of the oilsands prospects, which are mainly in the Athabasca region of Canada, along with some mature gas and oil fields in Canada.

EnCana is to distribute shares in Cenovus on Monday (Dec. 7) on a one-for-one basis. Cenovus stock, using the "CVE" symbol, began trading on the Toronto Stock Exchange last Thursday and is to begin trading on the New York Stock Exchange on Monday.

At the special meeting called to vote on the split, some shareholders questioned whether EnCana, created in 2002, could remain dominant enough to avoid being taken over. EnCana has been attempting to add value to its share price since the company was created seven years ago, and it's long been considered a merger target for oil majors looking for natural gas prospects (see NGI, Oct. 16, 2006; April 5, 2002).

EnCana Chairman David O'Brien, who chaired the special shareholders' meeting late last month, said the separate companies would be better positioned to create value because they both would be "pure plays." As two companies, the sum of the parts is more than what would be achieved under the same corporate umbrella, he said.

"It's certainly possible, but probably not likely," O'Brien said in response to a shareholder's query about becoming a takeover target. "Obviously if you split the company into two, effectively each of the companies will be about half the size of EnCana prior to the split."

O'Brien, who also presided over the breakup of Canadian Pacific in 2001, said the split would result in a higher combined valuation for both companies.

"There's no better protection against a takeover than a better-valued share," O'Brien said. "Shareholders will be rewarded by improved share price relative to what EnCana would have been able to achieve."

CEO Randy Eresman told shareholders that "fortunately we're launching EnCana as one of the lowest-cost natural gas producers in North America. We've got exposure to all of the plays that are actually causing the value of natural gas production we're seeing today. Over time we think that will clear itself up and the best producers at the lowest cost will survive."

But could EnCana be vulnerable to a producer with deep pockets?

"The quiet consensus was that the new EnCana -- because of its very attractive asset base, the depressed state of natural gas prices and the fact its shares have been trading down in the grey market -- will likely make it onto someone's dance card fairly soon," said analyst Deborah Yedlin of Canwest. "It isn't lost on anyone that there are big multinational players that are refocusing their efforts on the natural gas side of the business to take advantage of a recovery in prices that many expect will be pushed by increased pressure to switch to the cleaner-burning fuel from coal."

Analyst Phil Skolnick of Genuity Capital Markets said he's not sure either EnCana or Cenovus would be worthwhile targets in the short term. Cenovus has a "natural white knight" in oilsands partner ConocoPhillips, which could ward off opportunistic buyers. And EnCana, with its solid balance sheet, "could actually be in the position of hunter rather hunted."

Standard & Poor's Ratings Service (S&P) last week lowered its credit rating on some unsecured EnCana debt to "BBB+" from "A-," with a stable outlook. Low natural gas prices were a factor, said S&P analyst Jamie Koutsoukis.

"However, significant internal growth prospects and its competitive cost structure continue to support the company's credit profile, and we believe EnCana's hedging practices should temper any negative effect on profitability due to low natural gas prices," said Koutsoukis.

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