99% vote to split EnCana into two

CALGARY – Shareholders of energy giant EnCana Corp. have voted overwhelmingly to split up the company.

At a vote held Wednesday morning at a downtown Calgary hotel, 99 per cent of shareholders voted in favour of the division, which will create the new EnCana, which will be focused on mainly natural gas business, and Cenovus Energy, which will focus mostly on oilsands.

There was some concern from shareholders about two smaller companies now being the target of takeovers.

"It is certainly possible, but probably not likely," said David O’Brien, chairman of EnCana Corp.

The last time Canada saw one of it flagship companies wilfully split into its component parts was in 2001 when Canadian Pacific spun its various subsidiaries into stand-alone corporations. That seminal event in turn paved the way for the merger of PanCanadian Petroleum–CP’s oil and gas unit–and Alberta Energy Co. in 2002 to form the original EnCana.

"I can’t ever recall something this size happening in the world of energy," says FirstEnergy research director Martin Molyneaux, who started covering AEC more than two decades ago. "The breakup of CP made a lot of people a lot of money. The pure play value of its components proved to be greater than the sum of its parts."

The rationale for breaking up one of Canada’s largest companies by market value is fairly well understood: it’s harder for a monolithic corporation to grow.

By breaking it down into its essential components, investors should be able to get a better sense of the intrinsic value of each respective company’s assets and how much they’re worth.

"The conversion of one leading unconventional resource company into two independent, premium entities unlocks greater long-term shareholder value from industry-leading North American energy assets," EnCana CEO Randy Eresman said when the deal was revived in September.

The split was originally announced in the spring of 2008 but shelved in the midst of the global financial crisis. At the time, the company’s shares were trading in the $100 range. On Tuesday, they closed at $55.95 on the Toronto Stock Exchange, up a nickel on the day.

Since the recovery began early this year, EnCana’s shares have lagged the broader market, losing about two per cent year-to-date compared to a 35 per cent gain for the TSX energy index.

The difference between the two numbers represents the potential upside to be gained by going ahead with the split.

FirstEnergy’s Molyneaux said it makes perfect sense "if you can see clearly that two-plus-two equals five." He’s confident the market will reward each of the new companies with higher multiples as new strategies are developed and put in place.

"I think a year from now people will say, ‘That was a brilliant move.’ In hindsight, it will look like it made a ton of sense."

EnCana will instantly become North America’s second-largest natural gas producer, with a commanding position in the continent’s emerging shale basins in northeast British Columbia, Louisiana and Texas.

Cenovus will be one of Canada’s largest heavy oil and oilsands producers, inheriting EnCana’s refining joint venture with ConocoPhillips.

According to Jim Osman, CEO of the London, England-based Spinoff Report, which tracks and analyzes corporate spinoffs, EnCana will benefit "due to investors clearer recognition of its impressive production growth, the re-rating of the stock and its attractive resource base," he said in a special report prepared in advance of the shareholder vote.

"As for Cenovus, the spinoff will allow investors to equally recognize and acknowledge its high cash flow generating capacity and strong refining capability, together with the fact that it’s a low cost producer."

If approved, the deal is expected to close Nov. 30 and the companies will begin operating as separate entities a day later.

Each new company’s shares have been trading on a "when issued" basis for almost a month and so far only a few analysts have begun covering them.

In a research note, Peters&Co.’s Kam Sandhar rated each as "sector outperform" with a $38 US target price for EnCana and $30 for Cenovus.

"We continue to believe that En-Cana and Cenovus will rank at the top of their respective peer groups."

Cenovus’ protoshares gained 72 cents or nearly three per cent in on the TSX Tuesday, to close at $28.12 Cdn. The stand-alone EnCana fell 50 cents, or nearly two per cent, to finish the day at $28.

spolczer@theherald.canwest.com