May 11, 2008 / 5:30 PM / 10 years ago

EnCana to split in two with oil at record highs

CALGARY, Alberta (Reuters) - EnCana Corp (ECA.TO), Canada’s biggest energy company, said on Sunday it plans to split into two separate oil and natural gas firms in an effort to wring out more value with crude prices at record highs.

<p>EnCana President and Chief Executive Officer Randy Eresman announces that EnCana, Canada's largest energy company, will be split into two energy companies in Calgary May 11, 2008. EnCana Corp said on Sunday it plans to split into two separate oil and natural gas firms in an effort to wring out more value with crude prices at record highs. EnCana, a $65 billion producer formed in a merger six years ago, said the new oil firm will operate its Alberta oil sands and U.S. refining assets, which it runs as part of a joint venture with ConocoPhillips. It will also encompass Canadian plains natural gas assets. REUTERS/Todd Korol</p>

EnCana, a $65 billion gas and oil sands producer formed in a merger six years ago, said the move should help investors better gauge the parts of its business and remove a discount it says it suffers in the stock market.

The new producers will be evaluated against “pure play” companies that are rewarded with higher stock market values, Chief Executive Randy Eresman told reporters.

“The expectation of us and the advice that we’ve gotten from our financial advisers suggests there’s a likelihood that, with time, we would see an increase in our overall multiples,” Eresman said.

The new oil firm, worth about a third of the enterprise value, will operate Alberta oil sands and U.S. refining assets, which EnCana holds as part of a joint venture with ConocoPhillips (COP.N). It will also hang onto Canadian plains natural gas assets.

The natural gas firm will operate Canadian foothills and U.S. properties, located mainly in the Rocky Mountain states and Texas. It will be North America’s second-largest natural gas producer, EnCana said.

Eresman acknowledged investors in the new gas firm will be exposed to higher commodity-price risk. But he said he expects prices to stay at recent high levels.

Investors will get one share in each new company for each EnCana share they have. The split is scheduled to be completed in early 2009.

EnCana shares have climbed by a third in the past 12 months as oil prices have doubled to more than $125 a barrel and natural gas prices have rebounded from two years of weakness.

One investor said the stock may jump on Monday, but questioned the need for the split.

“I don’t know if the true worth of EnCana is really going to change by cutting up the pie in different pieces. It’s an efficiently run entity now,” said Garey Aitken, chief investment officer at Bissett Investment Management, which owns more than two million EnCana shares.

“I don’t see that there’s an impediment to them executing on their (current) business plan. I‘m surprised.”

Still, Eresman said investors will benefit holding two companies with greater visibility and simpler structures.


“Their concern when they did the deal with Conoco was whether or not they would get full value for what they’d done in creating an integrated oil sands business,” Raymond James analyst Steve Calderwood said.

In 2006, Calgary-based EnCana had considered putting much of its business into a publicly traded income trust, but that came to a halt when Ottawa removed trusts’ tax advantages.

EnCana pumps its oil sands to the surface in wells with the aid of steam injected into the ground, a method known as “in situ” production. It generates steam by burning natural gas.

In its venture with ConocoPhillips, set up a 1-1/2 year ago, it also owns 50 percent of two U.S. refineries. The U.S. oil major has a half stake in most of the oil sands holdings.

EnCana’s natural gas business targets large unconventional reserves, where gas is trapped in hard-to-access deposits that require high-tech rock fracturing and busy drilling.

Such resource plays have created an industry buzz in recent months as numerous firms, including EnCana, have disclosed huge reserve estimates for lands in British Columbia and Texas.

EnCana became Canada’s top energy company in early 2002 through the merger of PanCanadian Energy and Alberta Energy Co, which both had massive landholdings in Western Canada.

Since then, it has sold off its conventional oil and gas and international assets to focus on its current two lines.

The new oil firm will produce 245,000 barrels of oil equivalent a day, including 860 million cubic feet of gas from the Canadian plains and 102,000 barrels of oil.

The gas firm will pump 2.92 billion cubic feet a day.

EnCana shares closed off 96 Canadian cents at C$86.52 on the Toronto Stock Exchange on Friday.

($1=$1.01 Canadian)

Editing by Renato Andrade

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