Encana Creates Oil Sands Prize

Buy-recommended Encana (ECA)’s revived plan to split into an integrated oil sands producer, Synovus Energy, and a more concentrated natural gas producer, which keeps the Encana name, may ultimately generate more value. Investor interest in the split, originally proposed a year ago, was reignited on September 10, when the company announced it would go forward. The original plan was suspended when equity and debt markets became too tumultuous. It has been reinstated now that markets are moving up again.

Applying McDep analysis to the financial and operating disclosures, we see Net Present Value (NPV) of $62 a share divided into $26 for Synovus and $36 for the 94% pure play North American natural gas producer. With Synovus, our Canadian coverage will expand again after losing Petro-Canada to takeover. Therein lies a tale as any number of global oil buyers, from China especially, may be interested in acquiring Synovus, or other bite-size producers, judging from recent actions.

Both stocks have upside potential in NPV from unbooked resources, a fact buyers, or investors, could readily use to justify higher price. Encana has shown the way to creating value with an enviable record in converting resources to reserves in a growth style likely to go on.

Finally, the oil price trend continues upward with the latest settlement prices for the average of futures for the next six years at $78 a barrel compared to the 40-week average of $71. Extraordinarily depressed natural gas price may have seen its low.

Originally published on September 15, 2009.