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EnCana split proceeds and oil-sands project advances

ENCANA IS to divide itself into two new entities, giving up its once-treasured role as Canada's largest combined oil and gas producer and North America's dominant pure-gas player. The C$3.5bn ($3.4bn) transaction, which EnCana has been assured is not taxable, is scheduled for completion at the end of the month. EnCana had intended to restructure a year ago, but delayed the plan because of economic turmoil.

The Calgary-based independent will split into a gas company retaining the EnCana name, with average production of 2.8bn cubic feet a day (cf/d), or 496,000 barrels a day of oil equivalent (boe/d). As such, it will rank third among the top-10 Canadian producers, behind Suncor Energy (following its take-over of Petro-Canada) at 0.71m boe/d and Canadian Natural Resources at 0.57 boe/d.

Meanwhile, the newly named Cenovus Energy will occupy eighth spot, with production of 248,000 boe/d from its heavy-oil and oil-sands operations.

"We believe the conditions are now favourable to proceed," EnCana's chief executive (CEO), Randy Eresman, told analysts last month. "Equity and debt markets have improved significantly, with debt financing available at reasonable cost." He said global and national economic indicators "suggest the world's economies are showing promising signs of recovery".

Demonstrating that stability is returning to financial markets, EnCana has arranged revolving and bridge credit facilities of C$2bn and $3bn for Cenovus, placing the net proceeds in escrow pending completion of the deal. It followed that with a $3.5bn private-debt offering for Cenovus. That left EnCana with long-term debt of almost $10bn, one-third of which will be moved to Cenovus.

In another flash of optimism, EnCana has said Cenovus will file a regulatory application early in 2010 for a new 80,000-120,000 barrels a day thermal-recovery oil-sands project at Narrow Lakes in northeastern Alberta.

Following Imperial Oil's decision to proceed with its C$8bn Kearl Lake project, the EnCana plan has helped offset several bits of bad news for the oil sands sector – the delay or cancellation of several projects, valued at over C$130bn.

The Cenovus venture, which analysts say will cost C$2.4bn-3.6bn (shared with partner ConocoPhillips), will incorporate the first large-scale commercial use of solvents such as butane or propane in steam injection to separate bitumen from deeply buried rock.

The company says the procedure could reduce greenhouse-gas emissions by 25-30% per barrel of production. According to EnCana oil-sands vice-president Dave Mudie, it will also increase bitumen recovery by more than the present 80%; reduce costs by extending the interval between wells to 130 metres from 100 metres; and cut the use of natural gas to generate steam by 600 cf per barrel oil-sands output, or about 30%.

Eresman, who will remain CEO of EnCana, is eager to pursue a new role as a promoter of natural gas, persuading legislators, automobile manufacturers, power generators and consumers that gas is the fuel source of the future. Eresman says his mission is to show how gas-fired power plants can displace coal and imported oil, bolstering North America's energy security, easing trade imbalances and, by using gas for transportation, reducing carbon dioxide emissions into the atmosphere by one-third.

But he concedes that before North America can build on its fleet of only 250,000 gas-powered vehicles a continent-wide network of filling stations is needed (PE 9/10 p18).

Although Eresman believes that creating two separate companies will unlock higher trading multiples, he is uneasy about the prospect of creating take-over targets. He has said the two companies hold assets that are "strategic to Canada" – echoing prime minister Stephen Harper's statement that Canada will exercise its right to block the external purchase of resources considered important to the country.

However, EnCana is not backing away from plans to sell conventional oil and gas assets considered non-core to both companies. David Potter, an analyst at Scotia Waterous, forecasts that Canada could reach a five-year high in 2010 for asset sales (not counting mergers and acquisitions), with EnCana, Cenovus, Suncor, Talisman Energy and ConocoPhillips poised to sell off 100,000 boe/d of production.

Martin Molyneaux, an analyst at FirstEnergy Capital, says it is more likely international buyers would be interested in Cenovus than EnCana, but "they would have to have the capacity to write a C$30bn-35bn cheque".


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