May 13, 2008 / 1:45 AM / 10 years ago

EnCana's days of flux may be nearing end

CALGARY, Alberta (Reuters) - EnCana Corp could be nearing the end of its own permanent revolution.

<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 has been in flux since even before it was created in early 2002 as Canada’s global energy flagship. Now, by breaking its remaining businesses in two, it may be headed for some unfamiliar stability.

“I’d like to think that this is the end game,” Blackmont Capital analyst Menno Hulshof said. “I can’t speak to what the companies are going to look like five years out, but I don’t see any major changes any time soon.”

After this next one, that is.

EnCana made waves in the energy sector on Sunday with its plans to split into a natural gas producer, concentrating on hard-to-access unconventional reserves in Canada and the United States, and an oil sands production and refining entity in a partnership with Houston-based ConocoPhillips.

Based on Monday’s stock price the gas firm could be worth more than $45 billion and the integrated oil firm more than $20 billion.

Chief Executive Randy Eresman aims to erase a discount he said the company has suffered in the market compared with competing “pure play” gas or oil producers, even as oil and natural gas prices have surged.

Investors appeared to agree on Monday, bidding the stock up 6 percent and adding nearly $5 billion to EnCana’s market worth.

It has reinvented itself often since predecessor PanCanadian Energy was spun out of the former Canadian Pacific Ltd empire in 2001, sowing the seeds of the long revolution.

First, it merged with Alberta Energy Co to create a firm with lands stretching across Western Canada, the U.S. Rockies and in numerous international locales. It also had related assets like natural gas storage facilities and pipelines.

Then it began pruning. It exited a troubled operation in Ecuador, sold projects in the North Sea and Gulf of Mexico and jettisoned the pipelines and gas storage.


That was when former Chief Executive Gwyn Morgan said EnCana would concentrate solely on resource plays in North America -- gas from tight sands or shale formations, and oil sands produced with the aid of steam injected into the ground.

It was an untested strategy. Such gas deposits are huge reserves but require brisk drilling and high-tech rock-fracturing techniques to keep production growing a slow but steady pace.

EnCana and several rivals have recently created industry buzz with big shale-gas finds in Texas and British Columbia.

In late 2006, the company, under Eresman, formed the venture with ConocoPhillips, giving it half stakes in refineries in Illinois and Texas in exchange for 50 percent of a portfolio of Alberta oil sands holdings.

“This (split) has been a long time in coming,” said Fraser McKay, an analyst with consultants Wood Mackenzie. “The reorganization of the business units in the way that it was done a couple years ago gave them the flexibility to slice and dice in a number of different ways.”

There were revolutions that never came to pass. In late 2006 it considered forming a massive income trust but that was scuttled when Ottawa -- pushed partly by the prospect of loss of tax revenue from such a major corporation -- said it would scrap the investment vehicles’ tax advantages.

The next year, it was also reported to have run numbers on spinning assets into a U.S. master limited partnership.

“I don’t think we can expect radical change in the next few years because it will be 2009 before this is done, and there’s not really a lot else that they can do, short of splitting the gas assets by Canada and the U.S.,” McKay said.

Of course, change may come from outside the boardrooms of the new entities. Until now, EnCana’s sheer girth has turned off potential buyers.

”They will ultimately present themselves as more manageable acquisitions, given size,“ Hulshof said. ”And the pure-play nature of these companies going forward is going to be tremendously attractive for potential acquirers.

“The potential for a takeout certainly increases.”

($1=$1.00 Canadian)

Editing by Rob Wilson

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