As prices soar, management looks to unlock the value and 'tremendous growth potential' in its gas plays
SHAWN MCCARTHY

GLOBAL ENERGY REPORTER

May 12, 2008

OTTAWA -- A few years ago, EnCana Corp.'s decision to focus on North American natural gas production was seen as a maverick strategy. Now, the company is hoping to capitalize on the buzz around natural gas for the benefit of its shareholders.

In recent years, natural gas has been relegated to the status of forgotten cousin as oil prices soared and Alberta's oil sands fuelled a boom in Western Canada that lent heft to the Canadian economy.

At the same time, many in Calgary's oil patch shifted their gaze to international prospects for growth in the face of steep declines in conventional oil and gas production.

EnCana, in contrast, shed foreign assets and doubled its investment effort in high-cost, high-risk, unconventional natural gas projects in the United States and Canada.

Now, after a period of slumping prices, natural gas is hot again. Prices have climbed nearly 50 per cent in the past year, closing on the New York Mercantile Exchange at $11.54 (U.S.) per million British thermal units on Friday. A year ago, natural gas prices were below $8 per million BTU.

In a bid to get full market value for both its natural gas and its oil sands business for shareholders, chief executive officer Randy Eresman yesterday announced EnCana is taking the bold step of dividing itself into two separate firms.

One company will contain EnCana's high-profile oil sands business. The other is a pure natural gas company that will develop unconventional projects through North America.

"Gas is back and has been for a few months now, and it's going to come back with a vengeance for the next few years," said Peter Linder, senior energy strategist at Calgary-based DeltaOne Energy Fund.

Though oil production gets more attention, even in Alberta, natural gas has contributed far more to the provincial treasury in recent years. In 2005-2006, natural gas accounted for 75 per cent of royalties paid to the province.

Mr. Eresman will become chief executive officer of the natural gas company, which will retain the EnCana name and represents two-thirds of EnCana's $65-billion market value.

There is been much focus on EnCana's oil sands business, will soon will be producing 200,000 barrels of crude per day and is expected to reach 400,000 b/d in the next eight years.

But EnCana is North America's biggest natural gas producer, and its management felt the market was undervaluing the gas side of its business, which suffered from low prices in early 2007.

"The tremendous growth potential associated with the portfolio of natural gas resources plays in the new gas company will be even more evident than it was before," Mr. Eresman said.

Under its previous chief executive officer, Gwyn Morgan, EnCana adopted what was widely considered a maverick strategy, moving away from conventional oil and gas exploration, both in North America and overseas. Instead, it focused exclusively on unconventional resources onshore in North America.

In oil, that has meant oil sands.

In gas, it is in a variety of plays, including deep drilling in Alberta, British Columbia and the western U.S.; coal-bed methane, in which the gas is trapped in coal formations, and, more recently, so-called shale gas, which is trapped in tight shale rock formations and is more commercially attractive as a result of advances in drilling techniques.

Mr. Eresman said the new natural gas firm will be North America's second-largest natural gas producer and expects production to grow by 7 per cent to 9 per cent annually.

Mr. Eresman said the gas company will continue to pay a dividend, as will the oil sands firm.

ENCANA TIMELINE

Early 2002 AEC and PanCanadian announce they are combining to form EnCana, focusing on North American resource plays and buying massive tracts of lands holding natural gas.

October, 2005 Randy Eresman takes over as CEO from Gwyn Morgan.

November, 2006 EnCana says it looked to turn more than a third of the firm into a $20-billion income trust, but stopped when Ottawa said it would tax trusts like regular corporations.

January, 2007 EnCana reorganizes into six major operating units.

May, 2008 EnCana splits into separate oil and gas companies.