The Board of Directors of EnCana Corporation has unanimously approved a proposal to split EnCana into two highly focused energy companies - one a natural gas company with an outstanding portfolio of early life, North American, natural gas resource plays and the other a fully integrated oil company with industry-leading in-situ oilsands properties and top-performing refineries, as well as an underlying foundation of reliable oil and gas resource plays. This transaction is designed to enhance long-term value for EnCana shareholders by creating two highly sustainable, independent entities, each with an ability to pursue and achieve greater success by employing operational strategies best suited to its unique assets and business plans.
The proposed corporate reorganization would be implemented through a court-approved Plan of Arrangement. This transaction will create a publicly-traded integrated oil company with oilsands as the growth driver. This company, which has a working name of IntegratedOilCo (IOCo), will focus on the development of EnCana's Canadian oilsands assets and refinery interests in the United States, underpinned by a well-established natural gas and oil production base in Alberta and Saskatchewan. IOCo assets, which encompass EnCana's Integrated Oil and Canadian Plains divisions, represent about one-third of EnCana's current production and proved reserves. EnCana's other major operating divisions, Canadian Foothills and USA, will form a pure-play natural gas company, aimed at growing existing high-potential resource plays in Canada and the United States. With a working name of GasCo, it will represent about two-thirds of EnCana's current production and proved reserves. It is expected that GasCo will retain the name EnCana Corporation. The permanent name of IOCo will be determined before the transaction closes.
Under the proposed transaction, which is expected to be completed in early 2009, EnCana common shareholders will receive one share in each of GasCo and IOCo in exchange for each EnCana share held. The transaction is generally expected to be tax free to shareholders. EnCana intends that the initial combined dividends of the two companies will be equivalent to EnCana's current dividend of US$1.60 per share annually. Dividends will be at the discretion of the respective boards of directors of each company. EnCana expects to continue recommending to its Board of Directors that the company pay a 40 cent per share quarterly dividend until the transaction is complete.
"Since its creation in 2002, EnCana has evolved into a leading producer of unconventional resources, achieving excellent financial and operating performance. Over the past five years, total shareholder return has been exceptional, providing a compound annual return of 24 percent on the TSX and 35 percent on the NYSE," said David O'Brien, EnCana Chairman. "Going forward, one outstanding energy company is dividing into two exciting energy enterprises, each highly specialized, each with the objective of being a leader in its specific business and both resolutely focused on continuing a tradition of sustainable shareholder value creation."
"We are initiating this process from a position of unprecedented strength. In the past few years, we have transformed EnCana into a leading producer of North American unconventional natural gas and integrated in-situ oil - a company with a unique, low-risk, sustainable growth profile. We have assembled an outstanding portfolio of unconventional natural gas, oil and in-situ oilsands assets. Our strong operational and financial performance has shown that our resource play model is working extremely well and we are ideally positioned for the future," said Randy Eresman, EnCana's President & Chief Executive Officer.
"Our natural gas business is very strong. We have delivered consistent production increases and cost improvements and our existing and emerging plays hold great potential. We have become North America's largest natural gas producer in one of the world's lowest-risk regions and largest energy markets. Our integrated oilsands business is into its second year of our 50-50 joint venture with ConocoPhillips. This successful partnership strategically and financially links premier in-situ oilsands assets with industry-leading refinery assets, creating one of the industry's lowest cost integrated oilsands developments," Eresman said.
"It is from this strong base that we take this next step along the path of enhancing value for our shareholders. We strongly believe that companies need to have disciplined focus on their expertise and core strengths in order to achieve full value from their assets, to capture opportunities and to effectively respond to changing markets. With the creation of these two companies, each management team will focus more directly on the critical success factors in its respective businesses. They will be better equipped to direct their strategies and operations towards building value by tailoring practices and execution to fit the unique nature of their assets. As well, with greater transparency and focus, the investment community will be able to more easily follow and more accurately assess and value these companies," Eresman said.
Concurrent with this announcement, EnCana has updated its estimates of 2008 pre-transaction cash flow to a range of between $9.6 billion and $10.0 billion to primarily reflect increases in forecasted commodity prices.
This transaction is aimed at continuing to build on current success by offering a number of significant benefits which are expected to include:
--Two pure-play onshore North American energy companies, including a premier natural gas company that is almost exclusively focused on natural gas exploration and development of resource plays, and a premier integrated oilsands business anchored by stable production and cash flow from well-established oil and gas resource plays.
--Mandate to pursue tailored strategies, which provides each company with a clear mandate to pursue short and long-term strategies best suited to its unique assets and business plans.
--Expanded growth opportunities improve and expand the strategic positioning and growth opportunities of each company.
--Two high-potential investments with which existing shareholders can retain ownership in both companies.
--Experienced leadership allows each company to be led by experienced directors and executives who have demonstrated success building EnCana.
--Sharpened focus, greater value transparency offer greater clarity on specific strategies employed and increased financial transparency.
--Better valuation allows investors and analysts to more accurately compare and evaluate the stand-alone companies against peers, competitors, benchmarks and performance criteria.
Upon completion of this transaction, it is anticipated that IOCo will be positioned to deliver sustained growth from industry-leading oilsands properties that contain resources sufficient to fuel significant oilsands growth for decades ahead. IOCo will also capture the benefits of the full value chain through EnCana's integration of two producing upstream Alberta oilsands assets - Foster Creek and Christina Lake, and two top-performing refineries at Wood River in Illinois and Borger in Texas. Upstream, construction is underway to increase production capacity more than 200 percent to an estimated average of about 110,000 net barrels of oil per day (bbls/d) by 2012. Current production is about 30,000 net bbls/d.
"I am excited to be part of this new high-growth integrated oil company and working with the people who will continue their history of ingenuity and success as we build even greater shareholder value from the company's strong asset base. From the moment of its creation, we expect this company will be an industry leader in sustainable growth - reliably pursuing economic, environmental and socially responsive behaviour," said Brian Ferguson, IOCo's designated President and Chief Executive Officer and currently EnCana's Chief Financial Officer. "IOCo will be a company that its 2,000 employees can be proud of."
"We estimate that IOCo's integrated oilsands assets are capable of achieving double-digit growth between now and 2016. We believe that its reservoirs are among the best in the oilsands business. Our oilsands teams have more than a decade of innovative technical and development experience in achieving industry-leading production and capital efficiencies. They have set the pace in reducing environmental impact and have consistently increased the energy efficiencies of daily production. In Saskatchewan, the Weyburn oil field is home to the world's largest carbon sequestration project. It has garnered global attention as a potential way to help reduce greenhouse gas emissions, and we see a natural opportunity for transferring its technology to our oilsands projects. In addition, our well-established gas and oil resource plays, where we have identified an inventory of 9,500 future well locations, are positioned to deliver highly predictable and reliable production. These are ideal characteristics for building a financially strong, sustainable, integrated oil company that builds net asset value per share," Ferguson said.
In October, 2006 EnCana announced that it had entered into an agreement with ConocoPhillips to create an integrated oil business. At that time, independently determined best estimates of recoverable bitumen for Foster Creek and Christina Lake were disclosed at more than 6.5 billion barrels and more than 2.5 billion barrels for Borealis, which is not part of the joint venture with ConocoPhillips. These estimates have not been updated and are not current. As a result of today's announcement, the greater focus on the in-situ oilsands assets of IOCo and given that IOCo will have all of its upstream operations in Western Canada, it is anticipated that EnCana will be reviewing the need to report the in-situ resources and other assets to be held by IOCo under the standards required by Canadian securities regulatory authorities.
Over the next decade, IOCo's target as part of the integrated oilsands joint venture with ConocoPhillips is to increase gross upstream bitumen production from Foster Creek and Christina Lake to approximately 400,000 bbls/d (200,000 bbls/d net to IOCo) and downstream refining capacity to about 510,000 bbls/d (255,000 bbls/d net to IOCo). IOCo's well-established shallow gas resource plays in Alberta are capable of providing strong cash flow to help grow production from its high-quality oilsands resources. Natural gas is the source fuel for oilsands steam generation and IOCo's gas production also serves as a natural hedge against volatile gas prices. IOCo's assets will also include successful enhanced oil developments at Pelican Lake in northern Alberta. Future in-situ potential opportunities include SAGD development of the Borealis oilsands assets. During the first quarter of 2008, IOCo's designated assets were producing about 100,000 bbls/d of oil and natural gas liquids (NGLs) and about 925 million cubic feet per day (MMcf/d) of natural gas, while the refinery assets were processing about 225,000 bbls of net oil per day.
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