Natural Gas Power Encana Split Up Welcome by Markets

OTTAWA -(Dow Jones)- EnCana Corp.'s (ECA) oil sands business may enjoy only a fleeting independence, as the Canadian energy giant's decision to spin off the unit could attract takeover bids as well as new investors.

EnCana - Canada's largest energy company by output and the biggest natural gas producer in North America - said Sunday it will split up into two companies, separating its growing oil sands business from its massive natural gas operations in a bid to rev up its stock. EnCana's management has long considered the company's shares undervalued.

The market response Monday was an immediate thumbs-up: Shares jumped nearly 7% to C$92.20 on the Toronto Stock Exchange, helping to push the index to a new record high and boosting EnCana's market capitalization to C$69 billion ($68.8 billion). Shares closed 1.5% lower Tuesday at C$90.85.

"We've been long-time holders of EnCana and think they've really done a terrific job over the last 18 months," said Laura Wallace, managing director at Toronto-based Coleford Investment Management Ltd. "The split will highlight the individual merits of each unit...(especially) the oil sands."

The move comes as crude oil continues to smash records almost on a daily basis, rising to within a hair's breadth of $127 a barrel in intraday trading Tuesday on the New York Mercantile Exchange. These prices have already boosted EnCana's stock, but the hope is that a focused oil sands business will profit further still as it comes out from the shadow of EnCana's much bigger natural gas operations, and opens up to investors looking for more exposure to the sector. But stripped of the gas unit's considerable heft, the oil sands could find itself swallowed up by a major company looking to do the same.

"The split definitely makes (the oil sands) a more attractive acquisition opportunity," said Fraser McKay, corporate analyst at Edinburgh-based consultancy Wood Mackenzie. "If you're a major oil company and you consider your own portfolio underweight in the oil sands... then it obviously provides a great target. And EnCana owns arguably the highest quality leases in Alberta."

Close To Conoco

The integrated oil sands business is the product of a 2006 joint venture with ConocoPhillips (COP). EnCana swapped equity in its oil sands for a stake in two of the U.S. major's Midwest refineries. Comprising about a third of EnCana's current assets, the oil sands would still be a major acquisition, but not impossible for a company big enough and determined to grab good assets among increasingly slim pickings.

ConocoPhillips' existing relationship with EnCana - and the sheer size of the U.S. energy firm - make it an obvious bidder. At present, the Houston-based company's oil sands production totals 60,000 barrels a day from the EnCana venture and a minority stake in Syncrude Canada Ltd. But it is investing heavily in Alberta, aiming for a massive jump to 1 million barrels a day over the next two decades from its existing partnerships and wholly owned leases.

Earlier this year, ConocoPhillips Canada President Kevin Meyers said he would "never rule out anything in the future" as regards further oil sands acquisitions.

"I'm not aware of any plans (for more acquisitions)," said ConocoPhillips spokesman Bill Graham, adding that it would be "pure speculation" to say if Conoco would consider snapping up the rest of EnCana's oil sands spinoff. In any case, EnCana's reorganization shouldn't have any impact on the existing relationship between the two companies, Graham said.

The gas company, however, is a different prospect. After the split, the natural gas company to come out of EnCana will become the No. 2 producer in North America because some gas assets will go to the oil sands company. However, the growth potential of that massive asset portfolio could see the natural gas company regain the top spot before too long, reckons Wood Mackenzie's McKay.