Encana Corp. (ECA), Canada’s largest natural gas producer, will sell shares of a royalty unit in Alberta as early as next month as it seeks to profit from investor demand for returns based on production.
About 5.2 million acres (2.1 million hectares) of oil and gas areas in central and southern Alberta will be put into a unit called PrairieSky Royalty in an initial public offering expected in late May or early June, Encana said yesterday. The company didn’t disclose how much it plans to raise in a separate prospectus filed with regulators.
The IPO will create one of Canada’s largest energy royalty companies as investors seek steady returns from the industry and Encana focuses on oil output under Chief Executive Officer Doug Suttles. The offer comes as equity issuance among Canadian oil and gas producers is on the rise amid higher commodity prices and rising cash flow from companies.
“There’s a lot of people interested in this company, so it will be very closely watched,” Dirk Lever, an analyst at AltaCorp Capital Inc. in Calgary, said in a phone interview yesterday. “Investors are looking for steady production, growth and not a lot of volatility in revenue -- nice steady cash flows.”
Oil and natural gas companies raised $2.73 billion in equity in the first three months of the year, more than six times the same period of 2013, according to data compiled by Bloomberg. PrairieSky will be the largest Canadian energy IPO since Cardinal Energy Ltd., a producer of oil in Alberta, raised C$225 million ($205 million) in December. Cardinal has risen 48 percent since it began trading.
Canadian Natural Resources Ltd. is also considering spinning out royalty lands it agreed to acquire from Devon Energy Corp., President Steve Laut said last month.
Encana first announced plans for the IPO in November. PrairieSky will be created from Encana’s fee-simple, mineral-title lands and associated royalty interests that formed part of its Clearwater business unit.
The royalty company will allow investors to claim returns from fees paid by other producers to drill on PrairieSky lands, which include Apache Corp., Canadian Natural, Devon and Bonavista Energy Corp., according to the filing.
PrairieSky may have an enterprise value of between C$3.3 billion and C$3.7 billion, Kyle Preston, an analyst at National Bank Financial, wrote in a note to clients today. The value assumes the stock will trade at a premium multiple of 15 to 17 times cash flow, Preston said.
The new company will pay dividends from lands that generated C$195.2 million in estimated free cash flow last year, according to the filing. The lands have produced the equivalent of between 14,275 and 15,158 barrels of oil a day over the past three years. Encana is expected to own the majority of PrairieSky shares after the IPO.
Encana fell 1 percent to C$24.53 at the close in Toronto.
Toronto-Dominion Bank and Canadian Imperial Bank of Commerce are jointly leading the sale, Encana said.
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