PrairieSky Surges in First Trading Day for Encana Unit

PrairieSky Royalty Ltd., the Encana Corp. unit that allows investors to share in oil and natural gas production payments, surged 32 percent in its trading debut, a gain that may spur others to separate operations.

The largest Canadian initial public offering in 14 years, PrairieSky climbed to C$37 at the close in Toronto from its C$28 sale price. Calgary-based Encana raised C$1.46 billion from the sale and may receive a total of C$1.67 billion if the underwriters exercise their option to buy more stock.

The PrairieSky IPO is part of Encana Chief Executive Officer Doug Suttles’s turnaround plan for the company. PrairieSky is the first of several Canadian energy IPOs expected this year, including a C$248 million sale by Journey Energy Inc., as higher fuel prices and a weaker currency boost returns.

“This is trading off the yield and the potential for the dividend to grow,” Randy Ollenberger, an analyst at BMO Capital Markets in Calgary, said today in an interview. The stock’s advance should cause Canadian Natural Resources Ltd. and Cenovus Energy Inc. to consider similar moves, he said.

PrairieSky has an estimated enterprise value of C$4.6 billion based on current trading, Phil Skolnick, an analyst at Canaccord Genuity Corp. in New York, wrote in a note. That would imply a value of $2.8 billion for so-called royalty lands owned by Cenovus and at least C$2.3 billion for Canadian Natural’s properties, he estimated.

Considering Spinoff

Canadian Natural is considering a spinoff of royalty assets that are expected to deliver at least C$140 million of pretax cash flow in 2014, President Steve Laut said on a May 9 conference call, including properties purchased from Devon Energy Corp. this year.

Cenovus doesn’t plan to change the ownership of its royalty lands, CEO Brian Ferguson said on an April 30 call. The company, which has 2.4 million acres (971,249 hectares), doesn’t have any current intention to restructure or spin off those properties, Brett Harris, a spokesman, said in an e-mail this week.

Encana sold 52 million shares and the underwriters have an option to buy an additional 7.8 million, according to a statement today. The company, which continues to hold a 60 percent stake in PrairieSky, raised the initial offer price from as low as C$23, according to April 30 marketing documents.

PrairieSky’s stock gain isn’t surprising given investor demand for dividend payments, David Cockfield, a fund manager at Northland Wealth Management in Toronto, said in a phone interview today.

“It’s probably a good time for people to take their money and run but it gives an indication of the demand for that kind of product,” Cockfield said.

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