Trading off of the Upcoming EnCana Split

By Andrew Willis

EnCana (ECA) is weeks away from a formal break up, but that hasn‘t stopped enterprising traders from swapping shares of what will soon be two large Canadian energy companies.

As of Monday morning, EnCana’s two planned offspring can be bought and sold on what’s known as a ‘when issued’ market, a move that's expected to create all sorts of trading opportunities.

EnCana will be split into a natural gas play that will keep the parent company’s name, and Cenovus, a company that will be weighted towards heavy oil. In a report early Monday, RBC Dominion Securities analysts said their “sense is that the market was somewhat surprised with the Nov. 2 timeline, and that many investors are only now just beginning to sharpen their pencils as to where the pieces will trade and what actions they should take.”

Over time, EnCana’s decision to split the company is expected to find favor with investors, as pure plays tend to command premium prices. RBC Dominion said: “As individually tailored strategies for EnCana and Cenovus are unveiled later this year, the pieces will trade at a premium to the combined entity.”

To differentiate between the two companies, RBC Dominion’s energy analysts called the parent company EnCana and the planned offspring GasCo.

“In the context of EnCana’s closing price on Friday, [RBC Dominion] would peg Cenovus’ share price at $27 (U.S.), with EnCana (Gasco) at $28 (U.S.),” said the investment bank's research team, adding it “would expect 4% to 7% accretion in the share prices of Cenovus and GasCo once the transaction closes.”

While exchanges are allowing trading on a ‘when issued” basis, EnCana’s shareholder vote on the split is not scheduled until Nov. 25.

If approved, the arrangement would become effective Nov. 30. After that, Cenovus and EnCana (GasCo) are expected to begin trading as separate entities on Dec. 3 on the Toronto Stock Exchange and Dec. 9 on the New York Stock Exchange.

The concept of 'when issued' markets has been used many time in situations such as restructurings.