?EnCana Corp., Calgary, (Toronto, NYSE: ECA) plans to split the company into two highly focused energy companies. News of this deal sent EnCana shares to $92, up from $86 prior to the announcement.
One company will focus on natural gas with assets primarily in Alberta and Saskatchewan, and with U.S. operations in the Piceance Basin in the Rockies and in the Fort Worth Basin in East Texas. Gross production is 3.1 billion cu. ft. of gas equivalent per day. Proved reserves are 11.8 trillion cu. ft. of gas equivalent. It is expected that the gas-focused company will retain the EnCana name.
The other company will be a fully integrated oil company focused on the Canadian oil-sands and with refinery assets in the U.S. The upstream assets include Foster Creek and Christina Lake properties in the Alberta oil sands. Net production is 30,000 bbl. of oil per day, with plans to increase production to 110,000 net bbl. by 2012. Proved reserves are 1.2 billion BOE.
The refining assets include two refineries in Wood River in Illinois and Borger in Texas with total refining capacity of 226,000 bbl. of oil per day. The oil-focused company does not have a name yet.
The break-up is expected to close in early 2009. The gas company will be run by current EnCana chief Randy Eresman as president and CEO. Sherri Brillion, executive vice president, strategic planning and portfolio management, will be CFO. Mike Graham, president, Canadian Foothills, and Jeff Wojahn, president, U.S., will continue to lead their divisions.
The oil company will include executive vice president and CFO Brian Ferguson, who will be president and CEO. Chief risk officer Ivor Ruste will be chief financial officer. President, integrated oil, John Brannan, and president, Canadian Plains, Don Swystun, will continue to lead their divisions.
Merrill Lynch and RBC Capital Markets are financial advisors to EnCana, CIBC World Markets is financial advisor to the EnCana board, and Scotia Waterous Inc. and Lehman Brothers Inc. are strategic advisors. The transaction expenses are expected to be less than C$300 million after taxes.
Eresman says, “We will continue to pursue increasing shareholder value through the specialized pursuit of sustainable production growth from our strong portfolio of unconventional natural gas assets.”
Ferguson says, “From the moment of its creation, we expect this company will be an industry leader in sustainable growth—reliably pursuing economic, environmental and socially responsive behavior. (The oil company) will be a company that its 2,000 employees can be proud of.”
Sanford C. Bernstein & Co. LLC analysts report that both companies already were in separate business streams, and the real advantage of this is a tax-effective way to put the oil company up for sale. If the company was to be sold after the deal is closed, there would be no capital gains tax to the selling entity, they report.
Standard & Poor’s Rating Services has placed EnCana’s corporate credit and senior unsecured debt ratings (A-) on CreditWatch with negative implications. S&P believes the new long-term corporate credit ratings of the two companies would either be the same or lower than the A- EnCana holds now.
S&P credit analyst Michelle Dathone says, “Based on our review of the asset portfolio composition of both companies, our evaluation of the growth profile associated with these assets and the expected capitalization and financial policies, the downside risk to the prospective ratings is limited to one notch.” The ratings on the new companies would fall between BBB+ and A-, she says.
She adds that removal of the counterbalancing oil assets from EnCana’s product mix weakens the proposed gas-focused company’s overall business-risk