EnCana Corp.’s strategy to divide and conquer, which apparently came after three years of internal debate, drew an enthusiastic cheer from investors and energy analysts Monday, sending the company’s share price to a new high and setting off rumors that one or both of new entities could be attractive takeover targets (see related story).

The Calgary-based producer’s stock price shot up almost 7% in heavy trading Monday to end at around $91.50/share. Under the plan, to be completed in early 2009 following shareholder and regulatory approval, GasCo, the revamped natural gas company, would retain the EnCana brand and would control the North American gas resource plays. IntegratedOilCo. (IOCo), still to be renamed, would focus on oilsands and U.S. refinery holdings. IOCo also would retain some shallow gas holdings to provide a hedge for oil prices and to generate cash flow.

“The key motivation of the transaction is to force the market to put a proper value on EnCana’s rich asset base,” wrote UBS Investment Research analyst Andrew Potter. UBS increased EnCana’s 12-month target price to $110/share from $94 to reflect “a sum of parts valuation” for the two new companies.

Some of Calgary-based First Energy Capital’s clients had long suggested that EnCana would be an attractive takeover target if it was split into two companies, said analyst Martin Molyneaux. However, First Energy had not anticipated such a solid reaction by the market.

“We never thought the market would elevate this over 8%,” Molyneaux wrote early Monday. “I’m kind of surprised the market has read so much into it.” EnCana, he said, still has “a long way to go” to obtain the required regulatory approvals.

Raymond James & Associates Inc. increased its target price on EnCana to $102 from $88 and raised the investment rating to “strong buy” from “outperform.”

“The outlook for each of the proposed new companies is better than EnCana as it is currently configured,” wrote Raymond James analysts Stephen Calderwood and Jia Liu. “GasCo benefits from the improvement in the production growth rate resulting from the fact that it would be smaller and contain the highest-growth natural gas assets of the company and none of the ‘no-growth’ areas such as Canadian shallow gas and Weyburn oil.”

Other integrated Canadian producers may contemplate similar breakups if EnCana’s strategy succeeds, said analysts. Calgary’s Nexen Inc., which has oil and natural gas assets spread across Canada, the North Sea, the Gulf of Mexico and the Middle East, and a joint oilsands project coming onstream later this year, likely will be watching EnCana, said analysts. Other potential “break-up targets” cited include Talisman Energy Inc., Canadian Natural Resources Ltd. and Husky Energy Inc.

“If investors do buy into this, then there will be tremendous pressure on others to do it too,” wrote Union Securities Ltd.’s David Doig.

Sanford Bernstein analyst Ben Dell said the “real upside to shareholders appears to be the fact that this is a tax-effective path to putting the integrated oil company up for sale.” The new unit would not be liable for capital gains taxes, he noted. The likeliest suitor, he said, would be ConocoPhillips, which is partnering with EnCana on Canadian oilsands projects, “given the near perfect overlap,” ConocoPhillips’ “lack of growth and abundant cash flow.”

EnCana created its oilsands business in 2006 after allying with ConocoPhillips refineries in the Midwest. However, the oily side of its business is dwarfed by EnCana’s burgeoning unconventional gas strategy, wrote Canaccord Adams’ Richard Wyman and Arthur Grayfer.

“The competition for capital in EnCana…might have left the oilsands business hungry for money as the growing list of new natural resource plays would likely have taken precedence,” the Canaccord analysts wrote in a note to clients.

The Motley Fool’s Toby Shute noted that the spinoff is not scheduled until early 2009, and investors would have almost a year to decide whether the split would be a good thing.

“EnCana is breaking the mold by breaking itself up, and I couldn’t be happier,” Shute wrote. “Though admittedly late to the EnCana story, I’ve been marveling at the merits of this profit factory for months now. The integrated oil joint venture with Conoco is a major success, and as with Suncor, EnCana’s oilsands resources will lead to many years of double-digit production growth. Meanwhile, the natural gas side of the business has no shortage of emerging resource plays worth getting excited about.”

Shute said the split would take time because “there are simply a lot of approvals pending — from courts to regulatory bodies to, of course, the shareholders. But this is all to your advantage, Fool. You don’t have to chase the pop in share price today to reap the benefits of this value-creating event. In all likelihood, you’ll get a better entry point some time in the next eight months or so.”

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