Encana: hunter or hunted?
It's been an interesting week for Encana. But if one Calgary analyst is right, the next few weeks could be even more interesting.
by Max Fawcett
by Max Fawcett, Managing Editor
In the wake of its breakup with PetroChina, Encana has indicated that it will look to find new partners in order to develop assets like its Cutbank Ridge property. In the Financial Post today, Martin Pelletier, the portfolio manager at TriVest Wealth Counsel in Calgary, raises an interesting question: wouldn’t it be easier for those prospective partners to simple buy Encana outright?
Pelletier’s firm has a net long position in Encana, so there’s some convergence of interests here – takeover rumours, after all, tend to have an uplifting effect on the price of depressed stocks like Encana (and Research in Motion) – but his thesis appears to be sound. “For example,” he writes, “under terms of the Cutbank JV and according to TD Newcrest calculations, PetroChina was to have paid an expensive $4.35/mcfe on a proven (1P) basis, $4.15/mcfe on a proven and probable (2P) basis and $1.02/mcfe on a proven, probable and best estimate of contingent resources (2P+2C) basis – $5.4 billion transaction price adjusted for land costs at $2,500 per acre.”
“With the recent sell-off of EnCana’s share price,” he continues, “this compares to the company‘s enterprise value of only $2.00/mcfe on a 1P basis, $1.25/mcfe on a 2P basis and $0.45/mcfe on a 2P+2C basis. Another way of looking at it is that PetroChina was acquiring only 7% of EnCana’s booked 1P and 2P+2C reserves for 19% of the company’s total enterprise value.”
“Therefore,” Pelletier concludes, “it wouldn’t surprise us if EnCana was on a number of radar screens as a take-out candidate especially for those looking for a low-cost way of establishing a long-term positioning in natural gas.” A takeover of a major Canadian resource company might sound like a non-starter, given the Harper government’s handling of the BHP Billiton/Potash schmozzle, but there are some key differences. Unlike Potash Corp., a takeover of Encana wouldn’t dramatically effect government royalty or tax revenues, while it’s safe to assume that the acquiring interest would want to keep the head office functions – for now, anyways – located in Calgary.
It’s happened before, too. In late 2009, Exxon-Mobil bought out XTO Energy, a company that had dimensions – both in terms of its size and the portfolio of assets that it possessed – that are strikingly similar to Encana’s. If it happens again, Encana shareholders would stand to do quite well. “If one were to apply the XTO takeover parameters to Encana,” Pelletier writes, “we calculate the company would trade at approximately $47.80 per share on a production basis, $44.00 per share on a 1P basis, and $55.50 on a 3P basis.”
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