(Source: Business Wire)
The Board of Directors of EnCana Corporation (TSX, NYSE: ECA) has unanimously approved plans to proceed with a corporate reorganization to split EnCana into two highly focused energy companies: one a natural gas company -- EnCana (GasCo), which has an outstanding portfolio of prolific shale and other gas resource plays across North America, and the other an integrated oil company -- Cenovus Energy Inc., which has industry-leading enhanced oil production and top-performing refineries, as well as an underlying foundation of reliable oil and gas resource plays. This transaction -- expected to close November 30, 2009 -- is designed to enhance long-term value for EnCana shareholders by creating two sustainable, independent, publicly traded companies, each with an ability to pursue and achieve greater success by employing operational strategies best suited to its unique assets and business plans.
EnCana first announced the proposed corporate reorganization on May 11, 2008 and was advancing plans for the split last fall when the global debt and equity markets experienced unprecedented turmoil and volatility. Given that uncertainty, EnCana announced on October 15, 2008 a revision to the original reorganization schedule and delayed seeking shareholder and court approval for the transaction until clear signs of stability returned to the financial markets.
"We believe the conditions are now favourable to proceed with the split. Equity and debt markets have improved significantly with debt financing available at reasonable cost. Global and national economic indicators suggest that the world's economies are showing promising signs of recovery. As well, the strategic rationale for creating two leading energy companies remains as sound as ever -- the conversion of one leading unconventional resource company into two independent, premium entities unlocks greater long-term shareholder value from industry-leading North American energy assets," said Randy Eresman, EnCana's President & Chief Executive Officer.
"While natural gas prices are currently low, we have reduced our near-term commodity price risk by hedging a significant portion of our expected production for the 2009-2010 gas year. We are a leader in low-cost natural gas production and our continued pursuit of that objective helps us enhance our competitive position during periods of low commodity prices. Over the longer term, we believe the current low natural gas prices are not sustainable and we expect a recovery in prices in 2010," Eresman said.
Strengthened foundation for creating two leading energy companies
"In addition, the financial and operational strength of each company's asset base has improved during the past year. Additional drilling in our natural gas shale plays has advanced our understanding of their enormous potential and increased our confidence in our ability to grow these prolific new natural gas supplies from the Montney, Horn River and Haynesville plays. With the start up of two new phases at Foster Creek and continued production increases from Christina Lake, gross production from these enhanced oil recovery projects now exceeds 100,000 barrels per day, a significant milestone in the long-term oil growth plan for the assets that will be transferred to Cenovus. Construction of our coker and refinery expansion (CORE) project at the Wood River refinery is past the midpoint. It is on time and on budget, and is expected to start up expanded capacity in early 2011. And overall, looking at the financial position of EnCana, our debt at August 31, 2009 was about $8.2 billion, down about 19 percent from when we first announced our plan to split in May 2008," Eresman said.
Well advanced reorganization plans lower transaction risks
"Our extensive work in the past year has helped reduce the risks associated with the transaction. We have received tax rulings from the Canadian and U.S. federal tax authorities that confirm, subject to the terms of the rulings, that the transactions will not be taxable from a corporate and shareholder perspective. We have secured committed financing for Cenovus that will support its independent business plan. We have acquired and built much of the infrastructure for Cenovus's information technology systems. The leadership teams have been identified and employees have been assigned to new or continuing roles in each of the proposed companies. Having completed this foundational work, and with the return of financial market stability, we are proceeding with this value-creating transaction in a prompt and prudent manner," Eresman said.
Continuing tradition of focused execution to deliver enhanced value and capture competitive opportunities
Since its formation in 2002, EnCana has established a strong track record of value creation through the continued pursuit of low-cost natural gas and oil production, growth in proved reserves and an innovative strategy of developing unconventional natural gas and oil resources in North America. That success is founded in the central belief that companies with a disciplined focus on establishing leadership in their core business will earn increased value recognition of their assets, capture competitive opportunities and be best positioned to effectively respond to changing markets. With this planned split into 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. The two companies will be focused on achieving attractive total shareholder returns through a combination of growing production and reserves, achieving strong refining margins, paying a meaningful dividend and by investing free cash flow in share buy backs. With greater transparency and focus, the investment community will be able to more easily follow and more accurately assess and value these companies.
Benefits of the transaction
This transaction is aimed at continuing to build on current success by offering a number of significant benefits which are expected to include:
Two highly-focused North American energy companies
a premier natural gas company that is almost exclusively focused on natural gas exploration and development of resource plays, including prolific shale gas plays
a premier integrated oil company anchored by stable production and cash flow from well-established oil and gas resource plays
Mandate to pursue tailored strategies
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
improves and expands the strategic positioning and growth opportunities of each company
Two high-potential investments
both companies will be leaders in their peer groups and existing shareholders can retain ownership in both companies
Experienced leadership
each company to be led by experienced directors and executives who have demonstrated success building EnCana
Sharpened focus, greater value transparency
greater clarity on specific strategies employed and increased financial transparency into the specific businesses of each company
Better valuation
investors and analysts will be able to more accurately compare and evaluate the stand-alone companies against peers, competitors, benchmarks and performance criteria
EnCana shareholders to own one share in each of the two companies
The proposed transaction would be implemented through a Plan of Arrangement under the Canada Business Corporations Act and is subject to shareholder approval, approval of the Court of Queen's Bench of Alberta, receipt of appropriate regulatory approvals and satisfaction of other customary closing conditions. Under the proposed transaction, EnCana common shareholders will retain their EnCana shares and receive one Cenovus common share for each EnCana share held. EnCana intends that the initial combined dividends of the two companies will be approximately equal to EnCana's current dividend of US$1.60 per share annually. Future dividends will be at the discretion of the respective boards of directors of each company and no dividend policy has yet been adopted.
Creation of two independent energy companies
Upon completion, this transaction would create Cenovus Energy Inc. -- a publicly traded integrated oil company that will be focused on the development of EnCana's Canadian enhanced oil assets and United States refinery interests, underpinned by a well-established natural gas and oil production base in Alberta and Saskatchewan with significant capacity to deliver long-term free cash flow. The Cenovus assets, which encompass EnCana's Integrated Oil and Canadian Plains divisions, represent about one-third of EnCana's current production and proved reserves at year-end 2008. EnCana's other major operating divisions, Canadian Foothills and USA, would form a pure-play natural gas growth company, aimed at growing existing high-potential resource plays in Canada and the U.S. This natural gas company would retain the name EnCana Corporation and represents about two-thirds of EnCana's current production and proved reserves at year-end 2008.
Cenovus -- a premier enhanced oil growth company integrated with expanding refinery capacity
"At inception, Cenovus is designed to be North America's premier enhanced oil company. Our enhanced oil recovery projects at Foster Creek and Christina Lake are positioned to deliver, over the next five years, an expected compound annual growth rate of 12 to 14 percent. Cenovus's total oil and natural gas production is expected to be steady as the company generates strong free cash flow from its mature gas and oil properties to fund enhanced oil production growth. Cenovus is also positioned to pursue the benefits of the full value chain integration of its successful enhanced oil recovery projects in Alberta with two top-performing refineries at Wood River in Illinois and Borger in Texas. Our integrated oil business is into its third year of our 50-50 joint venture with ConocoPhillips -- a successful partnership that strategically and financially links premier oil assets with 226,000 net barrels per day of ideally-located refinery assets, creating one of the industry's lowest cost integrated oil developments," said Brian Ferguson, EnCana's Chief Financial Officer, and designated President & Chief Executive Officer of Cenovus.
"While Cenovus's medium and long-term growth is expected to be driven by our enhanced oil recovery projects at Foster Creek and Christina Lake, we will also hold extensive lands covering top-tier oil reservoirs located in the heart of Alberta's Athabasca oil region, properties that provide opportunity to grow oil production for decades ahead. Cenovus's 1.4 million acres of existing high-quality leases contain an estimated 40 billion barrels of original bitumen in place. We believe these assets are among the best in the business. Our 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. We will continually look for opportunities to optimize our portfolio by advancing the development of new oil recovery technologies and will examine divestitures of mature natural gas and oil assets," Ferguson said.
"In addition, our well-established gas and oil resource plays consisting of enhanced oil recovery projects such as Weyburn in Saskatchewan, Pelican Lake in northern Alberta, plus vast Shallow Gas lands in southern Alberta, are capable of delivering strong free cash flow and they have an extensive inventory of future well locations capable of delivering predictable and reliable production. These are excellent characteristics for building a financially strong, sustainable, integrated oil company that builds net asset value per share," Ferguson said.
In 2009, the Cenovus assets are forecast to produce net oil production of more than 110,000 barrels per day and natural gas production of about 820 million cubic feet per day, for a total of about 248,000 barrels of oil equivalent per day. The assets contain about 8.1 million net acres of land and, as of the end of 2008, an estimated 1.2 billion barrels of oil equivalent of net proved reserves, which are about 75 percent oil.
EnCana (GasCo) -- a pure-play natural gas company growing high-potential North American resource plays
"Our natural gas business is very strong and the properties designated for EnCana (GasCo) are extremely well positioned to grow at anticipated double-digit rates. We have a diversified portfolio of unconventional natural gas assets across North America and hold a highly competitive land and resource position in a number of the continent's most promising shale and tight gas resource plays, including Haynesville in the U.S. and Horn River and the Montney in Canada. Our natural gas exploration and development teams have been industry leaders in applying long-reach horizontal drilling and multi-stage fracing -- revolutionary innovations that are the foundation for our continued pursuit of the lowest production costs and maximized margins. These transformative technologies have unlocked an enormous new inventory of natural gas supply in North America -- clean burning natural gas that is abundant, affordable and readily available to supply consumers' growing transportation and power needs while reducing the continent's environmental footprint," Eresman said.
Strong gas growth potential ahead
"Over the next five years we will be targeting a compound annual production growth rate of about 10 percent. Our properties have a proven track record of strong and sustainable growth. From 2006 to 2008, natural gas production from our Canadian Foothills and USA divisions grew by 12 percent. Despite the more moderate approach we have chosen to take for this year when gas prices are very low, these assets are capable of delivering strong growth for years ahead," Eresman said.
