EnCana delays split into two companies 'due to financial markets uncertainty'

By Lauren Krugel, The Canadian Press

CALGARY - EnCana Corp. (TSX: ECA.TO) has suspended a plan to split into two independent energy companies until stability returns to chaotic financial markets - confirming rumours that the restructuring was in doubt.

Shares in the Calgary-based gas producer and oilsands operator fell nearly 13 per cent to $44.30 on the Toronto Stock Exchange on Wednesday - about half of what they traded at after the proposed split was announced in May and before oil and gas prices plunged.

The company said in a statement Wednesday that "given the "uncertainty and volatility in the global financial markets," it is choosing to delay the timing of a shareholder vote - originally set for mid-December - "until clear signs of stabilization return to the financial markets."

The restructuring, which was supposed to have taken place in early 2009, would have seen the company's oilsands business spun off into a new integrated oil company called Cenovus, with EnCana continuing on as a pure-play natural gas producer.

CEO Randy Eresman said the underlying reasons for splitting off the integrated oil operations are still valid.

"However, there is currently too much uncertainty in the global debt and equity markets to proceed with external approvals at this time," Eresman stated.

"We cannot predict when the appropriate financial and market conditions will return, but EnCana will be prepared to advance the proposed transaction when it determines that the market conditions are appropriate."

There were murmurs in the oilpatch late last week, leading to published reports that EnCana was thinking about deferring its split. Some analysts had warned that Cenovus could become a takeover target if the spinoff were to take place in the current environment.

While credit markets have made it costlier to finance major corporate deals, turmoil in energy markets has also made the operating environment less attractive for many companies.

On Wednesday, oil prices closed at US$74.54 a barrel, its lowest level in 14 months, as OPEC reduced its 2009 petroleum demand forecast amid signs that the global economy is headed for a severe downturn.

Meanwhile, natural gas for November delivery lost 18.8 cents to US$7.14 per 1,000 cubic feet, about half of the levels it reached during the summer.

EnCana and its U.S. partner ConocoPhillips (NYSE: COP) operate a Canadian oilsands joint venture that aims to expand output from the Foster Creek and Christina Lake projects in northern Alberta.

In addition, the two companies are starting construction of a US$3.6 billion expansion of their Wood River refinery in Roxana, Ill., to boost refined oil production for the U.S. Midwest market.

Separately, EnCana is one of North America's biggest natural gas producers, with operations in Alberta, B.C., the U.S. Rocky Mountain states, Texas and elsewhere.

Salman Partners analyst Dragan Trajkov said Wednesday's announcement by EnCana came as no surprise, since it has become so much more pricey to raise capital by issuing corporate bonds or other securities in financial markets.

"Given the current market situation it's probably a good thing to preserve capital and I think that's what they're doing," Trajkov said.

The split will eventually be good for investors, who for the time-being are only concerned with protecting themselves from more market jolts, he said.

"I do believe that if the markets turn around, that the company will revisit their decision and they will split, mainly because it does create value, it refocuses the companies and it provides better valuation for the companies."

UBS Investment Research analyst Andrew Potter said Wednesday's announcement is disappointing, but he also added it does not come as a surprise, given recent market upheaval.

"Once markets improve we believe EnCana will move quickly to complete the transaction," he wrote in a research note.

"The postponement of EnCana's restructuring has nothing to do with its existing capital position; rather it is related primarily to the mechanics of transferring debt to Cenovus."

Eresman said EnCana "remains financially and operationally strong," and has hedged about 60 per cent of its gas production through October 2009 at an average price of US$9.15 per 1,000 cubic feet.

EnCana, which reports its third-quarter results on Oct. 23, said its cash flow and production "are in line with 2008 guidance," and its debt ratios are "at the lower end of the target range."

"We are working on our 2009 budget plans, taking a measured approach that is appropriate for current economic conditions," Eresman said.

"In addition to adhering to our long-standing practice of maintaining capital discipline, we will be even more focused on capital preservation in these uncertain times."