Encana Corp., Canada’s largest natural gas producer, will cut its workforce by 20 percent, slash its dividend and sell shares in a new royalty company as it seeks to boost cash flow.
Encana is focusing spending for 2014 on five oil and liquids areas -- the Duvernay, Montney, DJ Basin, San Juan Basin and Tuscaloosa Marine Shale -- the Calgary-based company said today in a statement. At least 800 jobs will be lost, based on the size of the workforce in 2012 as reported on the company’s website.
Doug Suttles, who became chief executive officer in June, said at a September investor conference the company needed to “clean up its portfolio” and would review its dividend as part of a strategic review. Encana, which has maintained a 20-cent quarterly payout since 2009, today announced a 7-cent dividend.
“The previous Encana was broken in my view so this is a bold step in the right direction,” Mason Granger, a portfolio manager who oversees C$400 million ($383 million) at Sentry Investments Inc. in Toronto, said by e-mail. “In a refocused company what we need to see now is solid execution on these five core plays that actually delivers returns to shareholders.”
Encana rose 3.1 percent to C$19.17 as of 4:01 p.m. in Toronto, the biggest increase since Sept. 12.
The shares have the potential to gain 11 percent in the next 12 months, according to the average of 22 estimates compiled by Bloomberg. The stock has seven buy, 15 hold and four sell ratings by analysts.
Encana will put 5 million acres (2 million hectares) of land in its Clearwater business in Alberta into a separate company, with an initial public offering due in mid-2014. Encana will close an office in Plano, Texas, and keep its offices in Calgary and Denver.
Encana will retain a “significant percent” of the Clearwater business “early on,” Suttles said today on a conference call with analysts. Encana will consider selling more assets depending on market conditions, he said.
The value of the Clearwater lands could be as much as C$2.47 billion, John Stephenson, a portfolio manager at First Asset Investment Management Inc. in Toronto which manages about C$2.7 billion, said today. “The purpose of the IPO is to unlock value,” Stephenson said.
The Clearwater business extends from the U.S. border to central Alberta, the company said on its website. Encana in April 2012 entered into an agreement with a subsidiary of Toyota Tsusho Corp. in which the Japanese company committed to invest C$600 million in return for a stake in Clearwater.
Encana last month reported third-quarter results that beat analysts’ estimates after oil and petroleum liquids output increased. The company has been directing more spending to oil production after North American gas prices hit a 10-year low last year.
Encana will retain some gas properties outside the company’s primary areas of focus, in case prices rise, Suttles said.
“In essence what we want to do is retain some optionality in our portfolio,” he said. “We want to be able to move, depending on market conditions and results, capital around where appropriate.”
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. 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.
Encana plans to boost cash flow at three times the rate of production and will expand capital spending each year to 2017 as it brings in more money, Suttles said. Capital spending next year will be $2.5 billion.