Market Lauds EnCana Co Split; Shares Jump, Analysts Upgrade
OTTAWA, (Dow Jones Newswires), May 12, 2008
EnCana Corp.'s (ECA) shares staked out a new high Monday as the market responded immediately and positively to the decision of Canada's biggest energy producer to split into two.
Sunday's announcement also triggered a flurry of upgrades to analyst ratings and target prices for the stock, which jumped 9% to $93.65 soon after the markets opened, defying lower crude oil and natural gas prices.
Shares were trading 8.4% higher recently at $93.20.
The result of a 2002 merger, the $65 billion company plans to separate its growing integrated oil sands unit from its massive natural gas business - EnCana is North America's biggest natural gas producer - with the split expected to be completed early next year. EnCana has long held it is undervalued by the market and has previously considered spinning off a chunk of its business, believing that the company is less than the sum of its parts.
Scorching oil and gas prices have already pushed the stock up 28% this year, but the hope from EnCana's management is that two 'pure play' entities will be easier for investors to understand, and will subsequently be rewarded with higher valuations.
"Individually these two energy companies will have the ability to shine even brighter when contrasted against their industry peer group," said chief executive Randy Eresman in a statement Sunday. Eresman will take the reins at the gas-focused company next year.
His comments were echoed by analysts, a number of whom raised their target prices to above $100 a share.
The integrated oil sands business - created in 2006 when EnCana allied its oil sands output with two of ConocoPhillips (COP) refineries in the U.S. Midwest - was "dwarfed" by EnCana's much-larger natural gas business, and suffered in the eyes of the market, said Richard Wyman and Arthur Grayfer at Canaccord Adams. The bank raised its rating to a "buy" and its 12-month target price to $100 a share.
The split is also likely to improve the new Integrated Oil Company's, or IOCo, access to capital, Wyman and Grayfer said in a note to clients.
"The competition for capital in EnCana...might have left the oil sands business hungry for money as the growing list of new natural resource plays would likely have taken precedence," they said.
The corporate reorganization will give the "hidden assets of the downstream business" a market value more consistent with other integrated peers, they added.
About two-thirds of the existing company's assets, however, will make up the new GasCo, which is expected to keep the EnCana name. These unconventional gas assets span vast tracts of Western Canada and growing acreage in the U.S., where EnCana has been expanding aggressively in recent years.
The new entity will still be a major player, slipping just one spot to become North America's second-biggest gas producer, with the potential for further massive development in its emerging resource plays.
Analysts also speculated that the move could pressure EnCana's integrated Canadian peers to contemplate similar breakups, reversing the "bigger is better" trend that has built developed in Alberta's oil sands industry in particular.
Several point to Nexen Inc. (NXY), which has assets in the North Sea, the Gulf of Mexico and the Middle East, and has a joint oil sands project due to come onstream later this year. The company has been dogged with rumors that shareholders are pressing for the company to be split up, despite consistent denials from Nexen's management.
Analysts have also mooted Talisman Energy Inc. (TLM), Canadian Natural Resources Ltd. (CNQ) and Husky Energy Inc. (HSE.T) as potential breakup targets.
Copyright (c) 2008 Dow Jones & Company, Inc.
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