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EnCana to Split into Separate Gas and Oil Companies

Calgary-based EnCana Corp. Sunday announced it was splitting into two separate companies -- one a pure play in unconventional natural gas and the other an integrated oil company with some existing southern Alberta shallow gas. Given all the regulatory approvals, EnCana expects the new companies to be formed by early next year at a collective after-tax cost of "less than $300 million," the company said.

Both new enterprises are expected to rank among Canada's top 20 largest corporations and among the nation's six largest energy firms.

Concurrent with the announcement, EnCana's senior executives updated the company pre-transaction 2008 cash flow to a range of $9.6-10 billion, reflecting higher forecasted commodity prices.

The change was characterized by EnCana as having "minimal impact" on its employees, operations, suppliers, business partners and stakeholders. "During the transition, EnCana will conduct its business as usual, honoring all business relationships," said EnCana CEO Randy Eresman.

The announcement is the result of a three-month process that began at EnCana's February board meeting, according to Eresman, who called it a "major regulatory transaction" that will take at least eight months. In total, there will be added workforce because separate administrative structures, with separate boards, will be created for each new company. Currently, EnCana has 6,500 employees, 500 of which are at its Calgary headquarters, and it is estimated that an additional 500 jobs will be created collectively for the two new companies' head offices, both of which will remain in EnCana's current headquarters building.

Under Canada's Business Corporations Act, the proposed reorganization will be pursued with a court-approved Plan of Arrangement, and it is subject to approvals from both Canadian and U.S. tax authorities, EnCana said. EnCana shareholders will be given one share in each new company for their existing holdings in the company.

"One outstanding energy company is dividing into two exciting energy enterprises, each highly specialized, each with the objective of being a leader in its specific business, and both resolutely focused on continuing a tradition of sustainable shareholder value creation," said EnCana Chairman David O'Brien.

Each of the new companies will be larger than EnCana was in 2002 when it was formed by Alberta Energy Co. Ltd. (AEC) and PanCanadian Energy Corp., creating the largest independent natural gas producer in North America (see Daily GPI, Jan. 29, 2002). At the time, EnCana was described as a super-independent with an enterprise value of more than C$27 billion, with the largest proved reserve base in the world -- 7.8 Tcf and 1.3 billion bbl, equaling 2.6 billion boe.

The separate entities are more likely to attain the market value they deserve and that EnCana has been unable to achieve with them merged under one company, Eresman said. For both new companies there are substantial assets in the United States in basins in Wyoming, Colorado, Louisiana and Texas.

While hoping for "good growth all around," EnCana officials during conference calls with news media and financial analysts Sunday said there is "slightly higher growth potential" in the U.S. assets, which for the proposed gas company make up about 55% of its starting assets; 45% of the assets are in Canada.

EnCana stressed that its oil and gas operations currently are "running strong" and are well positioned to create more value, and the split will increase the opportunities to realize that value in each new unit. Each entity should "shine even brighter against their industry peer groups," Eresman said, by better focusing the expertise in each new entity.

Eresman is designated to be the CEO of the new gas company, and EnCana CFO Brian Ferguson is slated to be the CEO of the integrated oil company. The current heads of EnCana Integrated Oil and Canadian Plains, and for gas, Canadian Foothills and USA gas operations, will move to the new oil and gas companies, respectively.

Predicted to see annual production growth increases of 7-9%, the proposed stand-alone gas company (GasCo) will get 95% of its production from natural gas in eight different resources plays (CBM [coalbed methane], Bighorn, Greater Sierra, Cutbank Ridge, Jonah, Piceance, East Texas and Fort Worth). In addition to those established plays, Encana operating teams recently achieved promising exploration results in a number of North American shale plays including Horn River in British Columbia, the Haynesville shale in Louisiana and the Mannville CBM in central Alberta, the company said.

The integrated oil operations will offer 4-6% annual production growth rates with six resources basins (Foster Creek, Christina Lake, Borealis, Shallow Gas, Weyburn and Pelican Lake) and two refineries (Wood River and Borger).

The proposed GasCo will have 11,880 Bcfe and 1,980 MMboe, and about 3,500 employees. Integrated Oil will have 6,980 Bcfe and 1,165 MMboe, with about 2,000 employees.

Merrill Lynch and RBC Capital Markets are acting as financial advisors to EnCana.

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