Calgary — In a major reshaping of the Canadian oil patch, shareholders of EnCana Corp. Wednesday overwhelmingly approved a bid to split the company in two.
At least 99 per cent of shareholders who cast votes approved the deal.
The split is designed to give the market two relatively “pure-play” companies, each focussed on a single commodity. EnCana will concentrate on gas, while a separate Cenovus spends the next few years shedding about $500-million a year in gas assets so it can pursue the 40-billion barrels in oil sands assets it owns.
Critics have suggested the split is a risky strategy, given that it makes each company more vulnerable to takeover. Indeed, some in the oil patch believe the new EnCana will be a prime candidate for natural gas-hungry acquirers.
In fact, at the shareholder meeting Wednesday, EnCana executives faced several questions from investors worried that the split would result in the two smaller companies being taken over by foreign buyers.
EnCana chairman David O'Brien acknowledged that the two new companies could be more vulnerable, but argued that the split “should over time result in a much better share price for each of the constituent parts than the former EnCana. And if that is indeed the case, there's no better protection against a takeover than a fully valued share.”
Pure-play companies also have fewer protections against commodity prices, a fact that has been emphasized in recent months, when oil prices have staged a strong recovery while natural gas prices have languished. In a combined company, EnCana could use oil profits to help sustain its gas operations. Post-split, that internal diversification no longer exists, and the new EnCana faces the possibility of weak gas prices for some time to come.
EnCana chief executive Randy Eresman, however, believes the pure-play model will be a boon for shareholders. By giving markets two easy-to-understand companies, EnCana has estimated the value of the two companies could exceed what they were worth as a combined EnCana by more than 15 per cent.
The corporate breakup was first announced May 11, 2008, in the glossy months leading up to the apex of the boom – and only six years after EnCana itself was formed through a corporate marriage designed to fend off U.S. acquirers.
“We are initiating this process from a position of unprecedented strength,” Mr. Eresman said at the time.
That strength, however, was soon shaken, as the summer peak in oil prices quickly fractured into the economic turmoil of last fall. EnCana shelved the plan Oct. 15, with Mr. Eresman citing “too much uncertainty in global debt and equity markets to proceed with external approvals at this time.”
Yet the plans that were laid then did not have much time to gather dust. When credit markets returned to strength, EnCana pulled out its old documents and resumed what it had already started. Eleven months after shelving the split, EnCana announced it was proceeding again this September.
The company spent about $70-million (U.S.) to plan the split, which it has estimated will cost another $200-million to complete.
