EnCana Yanking Its Spin-Off (ECA, COP)

October 15, 2008 by Douglas A. McIntyre

Oil_well_logo_2Back in May, EnCana Corporation (NYSE:ECA) announced that it would split the company in two. One part would take the company’s oil sands properties and the other would retain the natural gas business. The oil-sands company was to be named Cenovus Energy.  This morning EnCana announced that it was delaying the spin-off due to"the uncertainty and volatility in the global financial markets."

Atleast the company noticed.

When EnCana first announced the deal, the share price was at a 52-weekhigh and climbed even higher, to more than $99. They closedbelow $40 yesterday. No one would be happy with that share price, evenfor each of the two parts of EnCana.

In its last quarterly report, EnCana’s net income missed estimates byabout $0.20. Some of that was attributed to mark-to-market losseson hedges, but the company’s costs were up and the company had gottenon the wrong side of the US Environmental Protection Agency due to adispute over flaring at its Wood River refinery in Illinois.ConocoPhillips (NYSE:COP) is EnCana’s equal partner in the expansion tothe Wood River and Borger, Texas, refineries, which will be capable ofprocessing 225,000 b/d of the heavy crude EnCana produces at its oilsands operations.

EnCana’s president and CEO said that the "underlying reasons" forsplitting the company are "still valid," and the company will proceedwith the spin-off when "appropriate financial and market conditions"return. That could be problematic. After all, what’s the point? UnlessEnCana’s share price improves dramatically, why would the split beworth the expense to shareholders? The company’s natural gas reservesare huge, but gas prices are low and dropping. The oil sands propertiesare also substantial, but costs there are rising, availability of wateris beginning to be an issue, and the price of crude needs to stay aboveabout $70/b to make oil sands mining profitable.

At least we won’t haveto write about company with a silly and hard to spell name like Cenovus any time soon.  More pain is being sent the way of EnCana today as shares are down over 8% at $39.80 right after the open.  Its 52-week trading is $34.71 to $99.36.

Paul Ausick
October 15, 2008