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Encana Readies Spinoff of Alberta Properties

Encana Corp. is readying a spinoff of PrairieSky Royalty Ltd. to create one of Canada's largest energy royalty companies with 5.2 million acres in Alberta that extend to the U.S. border.

The largest natural gas producer in Canada said late Monday PrairieSky had obtained a preliminary prospectus for an initial public offering set to be concluded by early June. Encana would receive net proceeds.

PrairieSky is being created from Encana's fee simple mineral title lands and associated royalty interests that formed part of the Clearwater business unit in central and southern Alberta. The spinoff of the Clearwater portfolio has been planned since last year and is estimated to be worth $2.5 billion or more (see Shale Daily, Nov. 5, 2013).

PrairieSky would not directly conduct operations to explore for, develop or produce petroleum or natural gas, Encana said. The company instead would focus on attracting third-party capital investment to develop properties that would provide royalty revenues as petroleum and gas are produced.

Once the offering is completed, Encana would hold the majority interest, and through December, provide some day-to-day administrative services. The Calgary producer plans to act only as an investor.

PrairieSky's board is to be led by Encana executives that would include James M. Estey as chairman and Sherri A. Brillon, currently Encana's CFO. Also on the board are Brian G. Shaw, Sheldon B. Steeves, Bruce G. Waterman and Andrew M. Phillips. The management team is to be led by Phillips, who would be president and CEO, L. Geoffrey Barlow as CFO and Cameron M. Proctor, corporate secretary.

The announcement by Encana came the same day it agreed to sell most of its Denver-based liquefied natural gas fueling business to Stabilis (see Daily GPI, April 14).

Standard & Poor's Ratings Services (S&P) has revised its outlook on Encana to "stable" from "negative."

"The outlook revision reflects our expectation that Encana's forecast cash flow and credit measures will improve materially under Standard & Poor's oil and gas price assumptions," said credit analyst Aniki Saha-Yannopoulos. "In our view, the company is a strong operator, and we expect it to increase its liquids production, which generates higher realized prices, and improve its costs, leading to substantially larger cash flows. "

S&P is forecasting Encana's funds from operations to net debt and net debt to gross earnings ratios to "improve materially within the next year to year-and-a-half.

"We also believe management's plans to keep capital expenditures (capex) and dividends within cash flow, announced asset sales, and future financial or strategic decisions will support improving credit ratios," Saha-Yannopoulos added.

Encana is focusing 75% of its capital spending this year -- $2.4-2.5 billion -- on five core plays that produce mostly oil and liquids.

"We forecast the company's new strategy would lead to a significant increase in liquids production (an increment of about 15,000-20,000 b/d from 2013 levels) leading to about 15% of 2014 production," said the S&P analyst. "The stable outlook reflects our view that Encana's credit measures will improve significantly from 2013 year-end results. We expect the improvement to be sustained as the company successfully executes its strategy of improving its production while maintaining a disciplined approach in keeping capex and dividends within its cash flow."

A positive rating action is "unlikely during our two-year outlook horizon given Encana's limited product and geographic diversity. An upgrade would be contingent on the company improving its business risk profile, either by diversifying its production and improving profitability, while maintaining its current competitive cost profile, and our expectation of improved credit measures."

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