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Encana's PrairieSky Beats Expectations in Market Debut

Canada's biggest public offering in 14 years, Encana Corp.'s PrairieSky Royalty Ltd., beat back all contenders on the Toronto Stock Exchange Thursday in its debut, closing more than 30% higher than at the open.

More than 26 million shares traded hands in the offering, higher than any other on the day, to end at C$37.00 (US$34.14). Encana initially had set its sights on possibly earning $26.00-28.00/share.

At the high end ($28.00), the initial public offering (IPO) was expected to raise about $1.46 billion (see Shale Daily, May 21). Based on Thursday's action, Encana should fetch closer to $1.96 billion. Fifty-three million shares were offered, with underwriters agreeing to sell up to seven million more as demand warranted.

PrairieSky was created from 5.2 million acres of legacy land in Encana’s Clearwater portfolio that stretches from Southern Alberta to the U.S. border. The company is to be majority owned by Encana but run separately, allowing investors to share in royalty payments from production on the lands.

"The successful launch of the PrairieSky IPO marks the achievement of a major objective in our 2014 plan that was laid out at the time of our strategy announcement in November 2013," said Encana CEO Doug Suttles, who took the helm almost one year ago. "The creation of PrairieSky has unlocked value from our royalty business, which is a great example of the quality assets in our portfolio. I am confident that PrairieSky's strong leadership team will capture the full potential of this unique asset base."

PrairieSky is a true legacy asset, to put it mildly. Fee lands in Canada date back to 1676 when England's King Charles II granted 948 million acres of land to Hudson's Bay Co. The company ceded the land to the Dominion of Canada, which in turn granted lands to companies and settlers to build a railroad and encourage western settlement. In 1881, those fee simple mineral title lands were granted to the Canadian Pacific Railway (CPR) in consideration for building the national transport system.

CPR formed Canadian Pacific Oil and Gas in 1958 to hold all of the fee simple mineral title land that it was conveyed. That energy company in turn formed PanCanadian Petroleum Ltd., a predecessor to PanCanadian Energy Corp., in 1971. Encana was created in 2002 through a merger with PanCanadian and Alberta Energy Corp. (see Daily GPI, April 18, 2002).

PrairieSky was formed from the fee simple mineral title lands and royalty interests that made up Encana’s Clearwater business unit in central and southern Alberta. The spinoff of the Clearwater portfolio has been planned since last year as part of Suttles' revamped strategy to turn Encana to a profit (see Shale Daily, Nov. 5, 2013).

The land grants within PrairieSky include most of the mines and mineral rights from odd numbered sections that are 24 miles wide on each side of the CPR rights of way in a checkerboard pattern. The land grant totaled 25 million acres. The block of land is bordered by the Bow River to the south and the Red Deer River to the north, forming a contiguous land position east of Calgary.

PrairieSky isn't in business to explore for, develop or produce petroleum or natural gas like Encana. Rather, it will focus on attracting third-party capital investments, said CEO Andrew Phillips. Through December, Encana plans to provide some day-to-day administrative services, and it would continue to have a majority stake in the company.

Using outside parties to develop properties would provide PrairieSky with revenues with "minimal or no operating costs, capital costs, environmental liabilities or reclamation obligations."

"Interest seems to be high for this low capital intensity, free cash flow generative business model," said Tudor, Pickering, Holt & Co. analysts in a note. At the high end of the offering range, $28.00/share, stock would be trading at 19 times cash flow with 2013 production of 14,300 boe/d, analysts said. "For every $3.00 move in the stock, PrairieSky's multiple expands by two times and our Encana net asset value of $25.00/ish will increase by 50 cents."

The management team now is "looking ahead and focused on executing our business plan...to develop one of the largest independently owned portfolios of fee simple mineral title in Canada," said Phillips.

The CEO has a solid oil and gas background. In 2010 Phillips founded and helmed privately held Canada's Home Quarter Resources Ltd., which develops property in southwest Saskatchewan and Alberta. He sold the company earlier this year. Phillips also formerly was vice president for exploration for Western Canada operator Evolve Exploration Ltd. and was an exploration geologist at Profico Energy Management Ltd. and at Renaissance Energy Ltd.

CFO L. Geoffrey Barlow previously served as the financial chief for Chinook Energy Inc. and for Canada's Husky Energy Inc. Cameron M. Proctor, the corporate secretary, is the former chief legal officer of Sinopec Daylight Energy Ltd.

The board is headed by Chairman James M. Estey, the retired chairman of UBS Securities Canada Inc. Encana's CFO Sherri A. Brillon serves on the board, along with retired CIBC World Markets Inc. Chairman Brian G. Shaw. Other directors are Sheldon B. Steeves, formerly chief of Echoex Ltd., and Bruce G. Waterman, former executive vice president of Agrium Inc.

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