July 3, 2008
Encana to Split into Separate Oil and Gas Companies
It was a Mother's Day to remember for EnCana. On Sunday, May 11, President and CEO Randy Eresman announced plans to split EnCana into two companies - one a pure unconventional natural gas play and the other an integrated oil company (IOC) driven by oil-sands development - and to take effect in 2009.The decision was a response to the market's reluctance to recognize the full value of the two segments within EnCana, said Mr. Eresman, an engineer who will head up the gas company, which is expected to retain the EnCana name. At the helm of the IOC will be Brian Ferguson, EnCana's Chief Financial Officer. According to both executives, it's "business as usual" for EnCana's 6,500 employees and business partners.
At the same time and a few blocks away, Canada's largest concrete pour was taking place at the Bow tower, EnCana's new corporate headquarters (in fact, it was the third largest pour in the world, behind the Howard Hughes Center in Los Angeles and the Al Durrah Tower in Dubai). To fill the 2,787 square metre base, more than 1,000 truckloads of concrete were used, pouring more than 14,000 cubic metres of concrete into the six-storey hole. This building is expected to be complete in 2011.
Regarding EnCana's split, Mr. Eresman said: "This restructuring will form two highly focused energy companies, each built on a foundation of premier assets, each focused on what they do best."
EnCana, Canada's largest energy company with an enterprise value of $75 billion (two-thirds attributed to the natural gas segment and one-third to its oil operations), was created in 2002 with the merger of Alberta Energy Company Ltd. and PanCanadian Petroleum Corporation. (Leading up to that $27-billion deal, called Operation Zebra, PanCanadian chief executive David O'Brien and AEC chief executive Gwyn Morgan were living lives of intrigue - taking on aliases, hiding out in a men's washroom and meeting surreptitiously in downtown hotel rooms.)
Under the proposed reorganization, EnCana's Canadian Foothills and USA divisions will form a pure-play natural gas company focused on growing existing high-potential resource plays in Canada and the United States. The company will represent about two-thirds of EnCana's current production and proved reserves. Approximately 95% of production from the company will be from natural gas. (EnCana uses U.S. dollars and reports production after royalties.)
This new gas company will target long-term, low-risk sustainable growth with a strong portfolio of current and emerging resource plays in key basins across North America. An annual production growth rate of between 7% and 9% is expected to deliver sufficient free cash flow to pay an attractive dividend and conduct an ongoing share buyback program.
This new gas company is expected to be the second largest natural gas producer in North America. Based on 2008 forecast production, pro-forma production after royalties is estimated at 3.1 billion cubic feet equivalent per day, including 2.92 bcf per day of natural gas and 30,000 barrels a day of oil and natural gas liquids.
This new gas company will have a land base of 16.4 million net acres of land onshore North America of which 11.3 million acres are undeveloped. The company has identified an inventory of about 16,000 wells on that land base, according to Mr. Eresman.
In Canada, this new gas company will hold lands containing the Chinook coalbed methane play in central Alberta, the Big Horn Deep Basin play in northwestern Alberta, and the Cutbank Ridge and Sierra resource plays in northeastern British Columbia.
In the U.S., resource plays include Jonah in Wyoming, a significant presence in the Piceance Basin in Colorado, the Barnett Shale in the Fort Worth basis and the Deep Boosier play in East Texas.
In addition to the Foothills and USA divisions, this new gas company will include the offshore and international division and the midstream assets. Each company will have its own energy marketing operations.
The new integrated oil company (IOC), which will include southern Alberta shallow natural gas, plans to deliver superior, sustainable growth from its integrated oilsands business, according to Mr. Ferguson. "Combining the very predictable shallow decline of the Plains production with the high growth of the integrated oilsands, the company will target an annual production growth in the 4% to 6% range," he explained. "Just like EnCana, this is a moderate pace of growth, but we have a high degree of confidence we can deliver for our shareholders."
IOC believes its steam-assisted gravity drainage operations are capable of annual growth of 15% to 20% for many years to come. Upstream construction is underway to increase production capacity to an estimated average of about 110,000 net barrels of oil per day by 2012. Current production is approximately 30,000 net barrels a day.
Oilsands production is expected to reach 100,000 b/d (gross) by next year, but it will require abut 100 mmcf per day of natural gas, according to Mr. Ferguson. IOC will produce nearly 900 mmcf/d of gas "That provides a tremendous economic hedge for us," Mr. Eresman added. "The shallow gas assets also spin off significant cash flow which can help fund the significant capital investments."
In addition to its SAGD projects at Foster Creek and Christina Lake, 50% owned with ConocoPhillips, IOC will include the Plains shallow gas unit, the 100% Borealis SAGD project and an enhanced oil recovery project at Pelican Lake, Alberta.
Other IOC assets will include:
* The world's largest carbon sequestration project at Weyburn, Saskatchewan.
* 50% interest with ConocoPhillips in the Wood River, Illinois and Borger, Texas refineries.
* At year-end 2007 the company had 8.4 million net acres of land onshore North American of which 3.9 million were undeveloped.
* The company will continue to look at the divestiture of minor properties, targeting about $100 million a year.
* During the first quarter, production was 100,000 b/d of oil and natural gas liquids and 925 mmcf/d of natural gas while the refineries were processing about 225,000 b/d of net oil.
* By 2016, gross bitumen production from Foster Creek and Christina Lake is targeted to rise to 400,000 b/d with downstream refining capacity increasing to 510,000 b/d.
* The company has identified an inventory of 9,500 future well locations in its well-established oil and gas plays.
$10.1 BILLION OUTSTANDING DEBT
Recent reductions in proposed Alberta royalties related to deeper wells and longerreach horizontal wells will be "meaningful" in the Deep Basin and the Manville coals respectively, said Mr. Eresman. "Both of those areas, I would expect, would be getting larger requests for capital funding."
While in the short-term, gas production may grow faster in the United States than in Canada, north of the border EnCana also has encountered great possibilities in the Montney tight gas and the Devonian shale gas play at Horn River. At present, production from the USA segment accounts for about 55% of total gas production with the remaining 45% from Canada.
At March 31, 2008, EnCana had long-term debt outstanding of about $10.1 billion, including about $8.2 billion in bonds and long-term notes. The company said it is working with its financial advisors to examine alternatives to provide an orderly and cost-efficient transition of debt between the two companies.
EnCana shareholders are expected to receive one share in each of the two companies in exchange for each EnCana share held. The transaction is generally expected to be tax-free to shareholders.
The restructuring of the Canadian businesses is expected to accelerate future taxes that will be recognized in 2008, increasing taxes by about $1 billion this year. This will be offset by a U.S. tax benefit which will accrue to the gas company in 2010 and subsequent years as a result of its return to independent producer status. The expected net present value of the tax cost of the restructuring is approximately $250 million.
This is EnCana's second attempt at restructuring after it unsuccessfully proposed spinning off assets into a royalty trust more than 18 months ago. That prompted the federal government on Halloween 2006 to dismantle the trust sector.
Mr. Eresman threatened to pull about $1 billion in capital spending from Alberta after the review panel released its recommendations in September of last year, but he said he was pleased with the provincial government's decision to review the "unintended consequences." (In response to last year's royalty panel report, Mr. Eresman said: "A royalty system can be developed that achieves Alberta's objectives without so severely damaging the province's future.")
Only time will tell whether these two new companies will be active as acquisitors, or because they are distinct businesses, bought by a larger company looking for excellent exposure to North American natural gas or oilsands.
Meanwhile, construction of the Bow continues. It is expected to be the largest building in Western Canada.
"THIS RESTRUCTURING WILL FORM TWO HIGHLY FOCUSED ENERGY COMPANIES, EACH BUILT ON A FOUNDATION OF PREMIER ASSETS, EACH FOCUSED ON WHAT THEY DO BEST," SAYS ENCANA PRESIDENT AND CEO RANDY ERESMAN. MANAGEMENT EXPERTISE
While David O'Brien is designated Chairman of the Board of Directors of EnCana's new gas company, Randy Eresman is a designated director of the new integrated oil company (IOC).
The designated executives of the new gas company are:
* President and CEO Randy Eresman;
* Chief Financial Officer Sherri Brillon, EnCana's Executive Vice- President, Strategic Planning & Portfolio Management;
* President of Canadian Foothills Mike Graham will continue to lead this division;
* President of USA Jeff Wojahn will continue to lead this division.
The designated executives of the IOC are:
* President and CFX) Brian Ferguson, EnCana's Chief Financial Officer;
* Chief Financial Officer Ivor Ruste, EnCanas Chief Risk Officer;
* President of Integrated Oil John Brannan will continue to lead this division;
* President of Canadian Plains Don Swystun will continue to lead this division.
EnCana's other corporate officers will also have executive roles in one of the two companies: Sheila Mclntosh, Executive Vice- President, Corporate Communications; Bill Oliver, Executive Vice- President Corporate Development and President, Midstream & Marketing; Gerry Protti, Executive Vice-President, Corporate Relations and President, Offshore & International Division; and Hayward Walls, Executive Vice-President, Corporate Services.
Copyright Northern Star Communications Ltd. May/Jun 2008
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