Encana Corp., the natural gas producer selling assets after losing half its value since 2010, is being urged by investors to cut its dividend and focus on profitable projects in the U.S. and Canada.
A dividend cut would allow the Calgary-based company to devote more resources to higher-yielding assets, said Greg Dean, a money manager at CI Financial Corp. in Toronto.
“So at current gas prices, they either cut the dividend, sell assets or both,” said Dean, who helps manage C$7.9 billion ($7.7 billion) for CI’s Cambridge Global Asset Management. “They definitely have stuff that other people would want to own.”
Encana “isn’t focused enough” and needs to “clean up” its portfolio after natural gas prices plunged to a decade low last year, Chief Executive Officer Doug Suttles said at conference in New York on Sept. 12. The CEO pledged to turn around the company by unloading so-called dry gas projects in the U.S. and Canada with fewer associated liquids such as butane. He also said the company would “evaluate” its dividend as part of a strategic review.
“We have heard feedback from investors on a wide range of topics related to Encana including varying thoughts on the dividend,” Jay Averill, a company spokesman said in an e-mailed response to questions on Sept. 23. “Ultimately, a decision on the dividend lies with the Board of Directors.” Encana is forecast to pay shareholders an unchanged dividend of 20 cents per share on Sept. 30, according to data compiled by Bloomberg.
Suttles, 53, who took over the top post at Canada’s biggest gas producer in June, estimated North American gas prices will be “range-bound” between $3.50 per million British thermal units and $4.50 in the next few years, from an average of $3.69 so far this year.
The gas producer’s stock decline began after natural gas prices started a slide in 2008, a year before Encana spun off its oil sands business to create Cenovus Energy Inc. Cenovus’s market value is now 44 percent higher than its former parent. To cope with falling gas prices, Encana has pursued a strategy of selling stakes in joint ventures to fund an expansion of its holdings in unconventional shale gas formations in regions such as northeastern British Columbia.
Joint ventures, like last year’s $2.2 billion agreement with PetroChina Co. on undeveloped acreage in the Duvernay region, will help to develop properties. Other joint venture partners include Mitsubishi Corp., Exaro Energy III LLC and Nucor Corp.
“There’s going to be a preference to sell the existing non-core assets,” said Michael Dunn, an analyst at FirstEnergy Capital Corp. in Calgary who has an “outperform” rating on the shares. “It’s not an ideal market, but nobody knows when that’s going to turn around. At least if they sell something now, they can get the ball rolling to fund more profitable operations.”
The company has properties in the Deep Panuke basin off the coast of Nova Scotia as well as leases in the U.S. Rocky Mountain states that it could sell, said Dunn.
“Encana has some of the best real estate on the block when it comes to natural gas resources and possesses solid execution capability,” said Greg Pardy, an analyst at RBC Capital Markets, in a note to clients. “The missing element in the equation has largely revolved around strategic direction.”
Encana has fallen 9.3 percent this year compared with a 4.9 percent gain this year for the S&P/TSX Energy Index of which Encana is a member. Encana was little changed at C$17.83 at 10:10 a.m. in Toronto.
The shares have the potential to gain 19 percent over the next 12 months, according to 22 analysts surveyed by Bloomberg.
“Encana’s current share price does not reflect its positive attributes, while its current valuation levels make Encana shares attractive,” Pardy. said.
Encana will report net income of $139.7 million in the third quarter and $167.3 million in the fourth quarter, according to analyst estimates compiled by Bloomberg. The company posted cumulative losses of $3.7 billion from the fourth quarter of 2011 through the first quarter of this year because of sinking gas prices.
Natural gas for October delivery fell 11 cents to $3.492 per million British thermal units on the New York Mercantile Exchange yesterday, the lowest settlement since Aug. 23
Job cuts along with a reduction of the dividend are also needed as Encana’s Suttles seeks to boost profit and bolster its balance sheet, analysts and investors said.
Reducing the annual dividend by as much as 50 percent to 40 cents a share is “warranted,” considering the payout is now “head and shoulders” above competitors, wrote RBC’s Pardy.
Encana’s 12-month dividend yield is 4.6 percent, according to data compiled by Bloomberg. That compares with 2.5 percent for Talisman Energy Inc. and 1.3 percent for Chesapeake Energy Corp. Suncor Energy Inc., Canada’s largest energy company, pays a dividend equal to 1.8 percent of its share price.
Encana has land in Alberta and northern British Columbia, as well as in parts of the U.S. including Colorado and Texas. The company has 75 years of production at current rates, according to the website.
Encana has more than 17 producing areas, compared with between one and seven for its peers and is weighted more heavily toward less profitable dry gas, Suttles said.
“We expect Encana to dispose of dry gas assets as well as some emerging plays in order to reduce the number of opportunities that it funds,” said Randy Ollenberger, a BMO Capital Markets analyst, in a note to clients. Encana is setting priorities for its assets that can remain profitable at a price for gas of $3.50-4.50, he said.
“North America’s third-largest natural gas producer is going through a metamorphosis and that metamorphosis takes time,” said Dirk Lever, an analyst at AltaCorp in Calgary. More sales of gas assets is expected and makes sense, he said.