EnCana Splitting Off Natural Gas Division

CALGARY - In a surprise Mother's Day announcement, EnCana Corp. on Sunday gave birth to two offspring companies, effectively calving off its integrated oilsands and natural gas divisions.

Even as cement trucks poured the foundations of EnCana's new headquarters in downtown Calgary, a block away CEO Randy Eresman was laying the groundwork for the split, which will take effect in 2009.

"We believe this is the right time," he said. "It's the logical next step in the evolution of EnCana."
The split will see the country's largest energy concern split into two of Canada's 20-largest corporations, ranking among the six largest firms in the oil patch.

Eresman said the as yet unnamed gas company would be North America's second largest natural gas producer while the integrated oil company will benefit from interests in refineries in Illinois and Texas.

Eresman will head the gas producer while present EnCana finance chief Brian Ferguson will become CEO of the integrated oil producer, which is currently being dubbed 'IOCco.'

Steve Calderwood, an analyst with Raymond James in Calgary, said he expects EnCana's stock to rise today, where it is traded in both Toronto and New York.

"A lot of it depends on commodity prices, but on a stand alone basis, this is going to be good for the stock price," he said. "The shares of EnCana are likely to rise."

Andrew Potter at UBS Securities Canada Ltd., also predicted the market could look favourably on the shuffle, particularly the oilsands piece.

"I like this transaction," said Potter, who said the move is not radically different from what EnCana was planning last year.

EnCana, which last year formed a downstream partnership with American refining giant ConocoPhillips, expects to increase oilsands production from the Foster Creek and Christina Lake fields in eastern Alberta to 400,000 barrels per day within the next decade.

"From the moment of its creation, I expect this company to be an industry leader in terms of sustained growth," Ferguson said.

He further noted that each individual company would be roughly equal or bigger than the original EnCana when it was formed from the merger of Alberta Energy Company and PanCanadian Petroleum in 2002.

The deal comes as oil prices hit an all-time high of $125.96 per barrel in New York on Friday and natural gas rebounded to $11.54 per million British thermal units. Canadian gas prices on Friday gained almost 23 cents to close at $9.90 per gigajoule.

Several analysts have predicted oil prices could eventually hit $200.

"A lot of it's to do with prices and a lot of it's to do with chasing opportunities that are out there," said Martin Molyneaux, who heads Calgary-based FirstEnergy Capital Corp.'s research department. "This really isn't about short-term numbers, it's more about long-term growth."

Molyneaux said splitting the company allows a more clear distribution of capital between EnCana's oil and natural gas assets.

"This way you don't constantly have to through the debate over where should I allocate dollars between the two."

Eresman said dividing the company along operational lines means "business as usual" for EnCana's 6,500 employees and business partners. In addition, the restructuring will have no impact on the construction of the new Calgary office tower, which is expected to be complete in 2011.

In fact, Eresman said it is likely that each company will increase staffing and that the combined economic impact on the city will be equal to or greater than EnCana's stand-alone presence.

This is EnCana's second attempt at restructuring after it unsuccessfully proposed spinning off assets into a royalty trust 18 months ago. That prompted the federal government on Oct. 31, 2006 to essentially eliminate the trust sector.

Plans were further delayed by the Alberta government's ongoing royalty review through most of 2007.

Eresman infamously threatened to pull about $1 billion in capital spending from the province after the review panel released its recommendations to jack up rates in September of last year, but the EnCana CEO said the culmination of the province's decision to review the "unintended consequences" of the plan has given it the green light to proceed with the reorganization.

In addition, he said it's likely that the company would increase spending for both oil and natural gas drilling.