A fear of being taken over by a better capitalized producer likely delayed EnCana Corp.’s plans to split into two independent energy companies, an energy analyst said last week. After rising above $70 billion in market capitalization last summer, the plunge in the stock market has cut its value to around $33 billion.
Until there are “clear signs of stabilization” in the financial markets, the Calgary-based producer said it would delay the split, which was to be put to a shareholder vote in December (see NGI, Oct. 6). The split would create an integrated oil company is to be named Cenovus Energy Inc., and the pure-play natural gas company is to retain the EnCana brand. EnCana first announced the split in May (see NGI, May 19).
“We remain committed to creating Cenovus and we are continuing to work on reorganizing our company’s structure so that we are ready to move forward with the transaction at the appropriate time,” said CEO Randy Eresman.
“The underlying reasons for creating the integrated oil company Cenovus, and establishing EnCana as a pure-play natural gas company, are still valid,” Eresman said. “However, there is currently too much uncertainty in the global debt and equity markets to proceed with external approvals at this time. We cannot predict when the appropriate financial and market conditions will return, but EnCana will be prepared to advance the proposed transaction when it determines that the market conditions are appropriate.”
In a note to clients, Canaccord Adams analyst Richard Wyman said, “We surmise the delay in the corporate reorganization is based on concerns that the successor entities are each small enough to be susceptible to unwelcome takeovers.” EnCana was trading at around US$14.33/boe, with 3.1 billion boe of proven reserves at the end of 2007. However, the valuation does not include upside from the company’s substantial but undeveloped land position, and that makes it “very attractive to a potential acquisitor.”
The current commodity price environment suggests EnCana will put more emphasis on investing for return on capital than growth in 2009, said Wyman. “EnCana is one of the lowest cost operators in the industry, so its financial performance is reasonably resilient to natural gas price volatility.” EnCana also is expected to resume its share buyback program with the reorganization plan indefinitely postponed, which also will be a plus.
Even in the current financial market turmoil, “EnCana remains financially and operationally strong,” Eresman said. “Our balance sheet remains very sound. Through this period of uncertainty, EnCana will act in a conservative, prudent manner that is consistent with the company’s tradition of continuing to pursue strong financial returns while managing risk and maintaining financial strength and flexibility.”
Over the next year EnCana has a “substantial” portion of expected future production hedged at strong prices. About 80% of EnCana’s total production is natural gas. For the 2009 gas year, which runs from November 2008 through October 2009, EnCana has about 2.5 Bcf/d — about 60% of current production — hedged at an average price of US$9.15/Mcf.
EnCana’s cash flow and natural gas and oil production also are in line with 2008 guidance, the company noted. EnCana is scheduled to issue its 3Q2008 results on Oct. 23, and it is targeting a net debt-to-capitalization ratio between 30% and 40%.
About 78% of EnCana’s outstanding debt is fixed-rate debt with maturities between 2009 and 2038. Upcoming debt maturities of $250 million in August 2009 and $200 million in September 2010 are “modest” relative to EnCana’s financial capacity and cash flow, the company noted. EnCana has committed bank credit facilities of around $4.8 billion, of which $2.7 billion was available at the end of September.
“We are working on our 2009 budget plans, taking a measured approach that is appropriate for current economic conditions,” said Eresman. “In addition to adhering to our long-standing practice of maintaining capital discipline, we will be even more focused on capital preservation in these uncertain times.”
Over the longer term, he said, “the North American and global demand for energy is expected to continue to rise. We have built our company and assembled premium unconventional resource assets to deliver sustainable, low-cost supply for many years ahead. Consistent with the sound financial and management principles that have guided EnCana’s success to date, we will continue to act in the best interests of shareholders in enhancing long-term value. At this time, that means we are continuing to plan and work toward the creation of Cenovus, but are deferring its full creation until the market conditions are appropriate.”
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