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Encana to Rally as CEO Shift Signals Oil Focus: Corporate Canada

January 14, 2013

Encana to Rally as CEO Shift Signals Oil Focus

Encana produces more than 20 times as much natural gas than liquid fuels like oil, based on energy content. Photographer: Norm Betts/Bloomberg

Encana Corp. (ECA) investors say the resignation of Chief Executive Officer Randall Eresman will revive one of Canada’s worst performing energy stocks by speeding a shift away from natural gas production to more- profitable oil.

The departure of Eresman, announced on Jan. 11, will spark a focus on liquid petroleum products after Eresman spun off Encana’s oil unit in 2009 just as natural gas prices plunged, said John Stephenson, who helps manage C$2.7 billion ($2.74 billion) at First Asset Investment Management Inc. in Toronto.

Shareholders had become “dissatisfied” with the company’s share performance and strategy with its emphasis on natural gas, said Stephenson, who owns Encana stock.

“The company had been floundering for some time and strategically it was adrift,” he said by e-mail from Toronto on Jan. 12. “I see new leadership as a positive for Encana since it will reinvigorate the organization and help focus the company on becoming more balanced between natural gas, liquids and oil.”

The spin off of oil sands producer Cenovus Energy Inc. (CVE) reduced Encana’s stature from Canada’s largest energy company with oil sands and overseas assets to a diminished producer of natural gas that posted $4.3 billion in losses in the past two- and-a-half years. As he gambled that turning Encana into a “pure” producer of shale gas would deliver profit growth, Eresman failed to see the impact of surging supplies on price, said Bill Gwozd, an analyst at Ziff Energy Group, an energy consultancy.

“Even if gas prices were in the high single digits, he could have made a lot of money,” said Gwozd in a phone interview from Calgary. “But now with gas prices as low as they are, the economics are very challenging.”

Price Declines

With gas prices hovering at less than $4 per million British thermal units for more than two years, Encana will likely accelerate its shift to drilling for oil and other liquid fuels, he said. “Industry likes to see a more balanced portfolio,” Gwozd said.

The U.S. Energy Department in a Jan. 8 report said 2013 natural gas prices will average $3.74 per million Btu. Prices averaged $2.75 in 2012.

Encana produces more than 20 times as much natural gas than liquid fuels like oil, based on energy content. The company plans to boost production of liquid fuels to 80,000 barrels a day by 2015 from 24,000 at the end of 2011.

Shares Plunge

The Calgary-based company has reported six quarters of losses over the past two and a half years, according to data compiled by Bloomberg. Encana is expected to post net income before one-time items of $249.8 million in the fourth quarter, according to the average of four analysts surveyed by Bloomberg. That compares with a loss of $246 million in the year-earlier period.

Encana has fallen 43 percent to C$19.50, from C$34.11 at the end of 2009. That makes Encana the 11th-worst performer on the 62-member S&P/TSX Energy Index (STENRS) over that period. The market value has dropped to C$14.3 billion. It rose one cent to C$19.48 in Toronto at 10:25 a.m.

Encana announced Eresman’s departure after the close of trading Jan. 11, saying he will retire after 35 years at the company. He will be replaced by board member and Range Royalty Management Ltd. CEO Clayton Woitas. Eresman, 54, will be an adviser of Canada’s largest natural gas producer until Feb. 28 and Woitas will remain in his new role until a permanent replacement is found, the company said in a statement.

Jay Averill, an Encana spokesman, declined to comment on the company’s strategy when contacted by Bloomberg on Jan. 13.

Medicine Hat

Eresman, who was born in the southeastern Alberta town of Medicine Hat, had been CEO since Jan. 1, 2006. In 2011, Eresman earned a total of $9.25 million, including salary, stock and bonus awards, according to data compiled by Bloomberg.

Bank of Montreal analyst Randy Ollenberger, called the change of leadership “potentially positive” in terms of shaking up the company. Ollenberger, who is based in Calgary, rates Encana the equivalent of a ’buy.’

“New leadership could bring renewed enthusiasm to the company as it shifts its strategy to a more balanced portfolio,” he said in a research note. “A fresh set of eyes may identify additional opportunities to generate shareholder value.”

Eresman engineered Encana’s transformation by spinning off its oil assets into Cenovus Energy in November 2009. Cenovus is now valued at C$25.3 billion, or 43 percent more than its former parent.

Split Shelved

The split was first announced in May 2008 and then shelved as the financial crisis caused commodity prices to sink. U.S. gas futures had dropped 42 percent from January through Sept. 11, 2009, when Eresman said the company would go ahead with the Cenovus spin off. Dividing the company was necessary because of diverging production technology, Eresman said at the time.

Encana was then forced by falling gas prices to pursue joint venture agreements with companies including Mitsubishi Corp. (8058), which on Feb. 17 agreed to pay C$1.46 billion for a 40 percent stake in development of Encana’s Cutbank Ridge shale gas acreage in British Columbia and Alberta. Last month PetroChina bought a 49.9 percent stake in the Encana’s Duvernay shale formation in Alberta for C$1.18 billion.

Prime Minister Stephen Harper last month introduced new foreign investment guidelines as he approved the sale of Nexen to Cnooc’s Ltd. of China. He said future takeovers of Canadian oil sands companies by state-owned entities would only be approved in “exceptional” circumstances. He didn’t offer similar protection for gas producers such as Encana and signaled joint ventures would still be welcomed.

China Ventures

The PetroChina agreement brought Encana’s net proceeds from joint ventures and asset sales to C$3 billion last year, up from an annual target announced at the company’s June investor day of C$2 billion to C$2.5 billion.

Ereman’s departure was probably a dismissal after the company’s poor performance, said Jennifer Stevenson, a vice president who helps manage about C$100 billion at Dynamic Funds and doesn’t own Encana stock.

“Usual retirements are phased in and pre-announced in my view,” she said. The new CEO needs to provide shareholders with “strong financial stewardship and a business plan,” she said.

To contact the reporter on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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