EnCana spin-off gets brush-off from analyst; Compton Petroleum eyes options to trim debt

By Cristal Cody

Tupelo, Miss., Sept. 11 - EnCana Corp. expects that its plans to split the Canadian oil and gas producer into two companies offers the best value, but it may be one of the worst moves, an analyst told Prospect News on Friday.

In other Canadian energy situations on Friday, shares of Compton Petroleum Corp. fell 20.71% after the company said it would offer C$150 million to a syndicate of underwriters and look for other ways to reduce debt.

On Wall Street, stocks fell Friday after a steady weeklong rally.

The Dow Jones Industrial Average lost 22.07 points, or 0.23%, to close at 9,605.41.

The Standard & Poor's 500 index shed 1.41 points, or 0.14%, to 1,042.73, and the Nasdaq Composite index closed down 3.12 points, or 0.15%, at 2,080.90.

Oil and gas split gets mixed reviews

Calgary, Alta.-based EnCana first announced the plan to split up its oil and gas assets in May 2008 but called it off in October after the financial markets seized up.

EnCana president and chief executive Randy Eresman said Friday on a conference call with analysts and media that conditions have improved enough to move ahead with the deal.

"The access to debt and the availability of debt at a reasonable price was really the clincher for us," he said. "Without that, we could not have proceeded. It was really the No. 1 item that prevented us from going forward with the transaction when we stopped it last fall."

EnCana, which formed in 2002, plans to spin off its oil assets into a company called Cenovus Energy Inc. and continue to operate the gas assets as EnCana Corp.

Under the terms of the proposal, EnCana investors will keep their shares and receive one share of Cenovus for each share of EnCana.

Cenovus will pay EnCana $3.5 billion for the oil assets, with up to $3 billion funded through a loan from RBC Capital Markets Corp.

EnCana shareholders will vote on the transaction on Nov. 25.

The proposal also must receive regulatory approvals, including from the Court of Queen's Bench of Alberta.

The companies expect the transaction to close Nov. 30.

Eresman said this is the best move to "unlock value" from the assets.

Shares of EnCana gained $4.34, or 7.94%, to close at $58.97 on Friday - a "knee-jerk reaction" to the news, Mark Gilman, an analyst with the Benchmark Co., told Prospect News on Friday.

Gilman said the firm has been against the split since it was first floated last year.

"We don't think it's a good idea at all, and our view of that hasn't changed," he said. "We don't see it as serving any affirmative objective. In my view, this is not a transaction that creates incremental value."

Gilman said the two companies likely are not going to hold more value than EnCana does now as a whole.

"The company in a spun-off form will not be able to optimize and allocate capital in the same way it can currently," he said. "Management has the capability to shift capital from oil sands to natural gas plays as opportunities dictate. In a split-off form, that opportunity no longer exists. Furthermore, it challenges the assumption that the market value of the two separate companies will be greater than the market value of the company as a whole."

Compton considers next move

Compton Petroleum said Friday that it would issue 120 million units at C$1.25 each to a syndicate of underwriters led by Canaccord Capital Corp. as it considers other alternatives for the Calgary, Alta.-based natural gas and oil company.

"This transaction is an important first step in our restructuring process, contributing to our future ability to unlock the potential of Compton's resource rich asset base," Tim Granger, president and CEO, said in a statement. "This will enable us to take advantage of opportunities that may emerge from the current industry environment, focusing on opportunities for future growth and value for our shareholders."

After the transaction closes as expected on Sept. 25, the company said it will have about 263 million shares outstanding.

In the statement, Compton Petroleum said it is "taking a multi-faceted, staged approach to recapitalization" efforts.

The company said it is considering alternatives to reduce its debt level, including through the conversion of debt to equity and "the sale of assets, and/or mergers or acquisitions."

Compton Petroleum shares lost 29 cents, or 20.71%, to close at $1.11 on Friday. The stock has traded from 42 cents to $7.54 over the past year.

Mentioned in this article:

Compton Petroleum Corp. NYSE: CMZ

EnCana Corp. NYSE: ECA

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.