Encana Deal Odds Increase As CEO Departs: Real M&A
Encana Corp. (ECA) is poised to attract suitors after the departure of its chief executive officer, whose bet on natural gas wiped out a third of the Canadian explorer’s value.
Randy Eresman, who retired this month after seven years as CEO, transformed the Calgary-based company into a producer focused on gas by spinning off its oil assets in 2009. The plan backfired as gas prices fell to a decade low, sending shares of Canada’s largest natural gas producer down almost 40 percent by the day he left. It was the biggest drop of any Canadian energy company of its size, according to data compiled by Bloomberg.
While regulatory issues and existing joint ventures could complicate a deal, Canadian Imperial Bank of Commerce said Eresman’s exit increases the odds of a sale of the $14.3 billion producer to an integrated oil company. Even as gas prices remain depressed, Encana’s gas-rich formations in Canada and the U.S. may appeal to companies looking to export the fuel to Asia, according to Veritas Investment Research Corp. China’s demand for natural gas may more than double by 2017 from 2011 levels, the International Energy Agency forecast in June.
Eresman’s departure “makes it more vulnerable” to a takeover, Daniel Cheng, a money manager at Matco Financial Inc. in Calgary, who helps oversee C$375 million ($373 million), including Encana shares, said in a telephone interview. “The stock price being depressed would certainly make it attractive on a relative basis. They have significant, interesting assets in a number of great plays.”
Jay Averill, a spokesman for Encana, said the company hasn’t received any offers “to my knowledge” and isn’t seeking a sale.
“You have a board that has publicly stated that they’re not interested in that conversation at this point,” Averill said in a phone interview yesterday.
Encana announced Eresman’s retirement after the close of trading Jan. 11, saying he would step down immediately after more than three decades at the company. Clayton Woitas, a board member, is standing in as interim CEO until a permanent replacement is found.
By spinning off the oil assets to form Cenovus Energy Inc. (CVE), Eresman reduced Encana from a diversified company with oil sands reserves to a producer focused on gas. Plunging gas prices have since resulted in losses in six of the past 10 quarters.
“It’s a core holding in most people’s Canadian equity portfolios and, to be frank, it’s been a dog,” John Stephenson, who helps manage C$2.7 billion, including Encana shares, at First Asset Investment Management Inc. in Toronto, said in a phone interview.
The stock fell 39 percent from the time Cenovus began trading in November 2009 through Jan. 11, when Eresman stepped down. That was a steeper decline than any other Canadian exploration and production company with a market value greater than $5 billion, according to data compiled by Bloomberg.
Today, Encana shares rose 0.7 percent to C$19.68.
Encana’s enterprise value is 42 times its daily production, expressed in thousands of barrels of oil equivalent, data compiled by Bloomberg show. That’s the lowest among its peers, the data show. The company also trades at a below-average multiple to earnings before interest, taxes, depreciation and amortization.
“You don’t have leadership, and you have a low share price,” Sam La Bell, an analyst at Veritas in Toronto, said in a phone interview. “Those together make you a target because the acquirer might think you can put in better management and create more value than you’re offering shareholders currently.”
Woitas, the interim CEO, said this month that Encana is “not for sale” and will continue seeking joint ventures to develop assets and diversify away from gas into fossil-fuel liquids including oil, which fetch higher prices.
Still, Encana could prove to be among the “many examples” of companies that appoint interim CEOs only to be later acquired, Andrew Potter, a research analyst at CIBC in Calgary, said in a Jan. 13 note.
Encana’s “vast feedstock” of gas acreage in Western Canada’s Montney, Duvernay and Horn River formations and the Haynesville formation in Louisiana may be attractive to companies seeking to chill and liquefy the fuel for export by tankers from proposed facilities along Canada’s western coast and the U.S. Gulf Coast, Potter wrote.
Gas consumption is set to rise in Asia, where India and China are investing in facilities that can receive imports of liquefied natural gas, or LNG, for domestic use, according to the International Energy Agency.
The most likely bidder for Encana would be a publicly traded U.S. or global oil company, according to Potter, who puts the odds of an Encana takeover at as much as 40 percent.
Chinese state oil companies also may pursue Encana for its gas reserves and expertise in unlocking the fuel from shale rock, said First Asset’s Stephenson.
PetroChina Co. (857), the publicly traded arm of China’s largest energy producer, state-owned China National Petroleum Corp., may be among bidders, Stephenson said. China Petrochemical Corp., or Sinopec Group as the parent of China’s largest refiner is known, may also be interested, he said.
PetroChina already has a relationship with Encana, through its C$1.18 billion joint venture on the company’s Duvernay lands. Sinopec is also active in Canada through its takeover of Daylight Energy Ltd. in 2011.
Shirley Lo, a spokeswoman for PetroChina who works for Hill & Knowlton Strategies, said the company declined to comment on any potential interest in Encana. A phone call to Lv Dapeng, Sinopec’s Beijing-based spokesman, wasn’t answered.
While Encana could attract suitors among state-owned Asian companies or other energy producers, Stephenson put the chances of a takeover at no more than 30 percent. That’s because a bid for Encana would be challenged by a stringent review under Canada’s foreign-takeover law, he said.
Prime Minister Stephen Harper announced changes to takeover guidelines through the Investment Canada Act in December, when he approved Chinese state-owned Cnooc Ltd.’s $15.1 billion takeover of Nexen Inc.
Harper prohibited further oil-sands takeovers by state- controlled companies, leaving the door open to gas acquisitions. Still, Encana’s vast holdings include lands on which the company doesn’t have to pay royalties on production, and that would probably cause the government to reject a bid, Stephenson said.
“You get into a review process and would get the public up in arms,” Stephenson said. “No one cared at all about Nexen, but Encana is a different story.”
A takeover of Encana may also be complicated by its multibillion-dollar joint ventures signed in recent years with state-owned and public companies including PetroChina, Korea Gas Corp., Mitsubishi Corp. and Toyota Tsusho Corp.
The web of partnerships “makes the company that much more complex from a takeover perspective,” Kyle Preston, an analyst at National Bank Financial in Calgary, said in a phone interview.
Still, with Encana lagging behind its peers and its leadership in flux, the door is open for a potential deal, said Todd Lowenstein, who helps manage $17 billion in assets at HighMark Capital Management Inc. in Los Angeles.
“One could argue that Encana has not performed in line with the group and has to answer to shareholders,” Lowenstein said in a phone interview. As a result, Encana is “vulnerable to some outside interest looking under the hood and seeing what’s there.”
To contact the reporter on this story: Rebecca Penty in Calgary at firstname.lastname@example.org