Integrated Oil Spin-Off Propels EnCana's Growth

EnCana Corp. (ECA) continues to move forward aggressively with its oil sands expansion plans, and its new, yet-to-be-named integrated oil spin-off will be the primary driver behind the company’s growth over the next decade, says Peters & Co. analyst Kam Sandhar.

Mr. Sandhar says in a research note:

With capital costs expected to remain high and increased attention upon regulatory applications, EnCana stands out as the company that already has the necessary environmental and regulatory plans in place to grow.

Calgary-based EnCana and ConocoPhillips (COP) are jointly developing a major integrated oil sands business that involves extracting heavy oil in Alberta and processing it in the United States. The joint venture will be held within Encana’s oilsands spin-off. Mr. Sandhar estimates production will grow to to 220,000 barrels per day from current levels of around 70,000 barrels per day. (The production values are for the full project, with EnCana’s stake at 50%).

Mr. Sandhar said:

The spin-off will continue to possess the largest in-situ resource base among its peers, the lowest operating and capital costs in the industry, and a defined plan less susceptible to regulatory delays than those of its competitors. We believe the company will be increasing its recoverable resource estimates to include its resource base in the Clearwater, Grand Rapids, and Grosmont formations, which will be incremental to its current estimate of 9.8 billion barrels of recoverable resource.

He added that each 10% increase in the resource estimate could be worth C$1.60 per share to the potential asset value of the company.

Mr. Sandhar is maintaining  his “sector outperform” recommendation on EnCana, though he has reduced his target price to $100 from $111 a share, “based on the potential asset value at the lower strip pricing.” The stock is currently trading in the $73-$74 area on the New York Stock Exchange and at about C$77 on the Toronto Stock Exchange.

Comments

[jjason:]

How come every time the price of oil goes up, the costs of getting oil from oil sands goes up? One would think that there would be economies of scale that would reduce oil prices from oil sands.

Any comments?

2008 Aug 27 03:11 PM

[VintonCounty:]

jjason: If there really is a reason, it might be that the oil sands operation needs lots of hydrocarbon energy.

FP Trading Desk: It sounds like the joint venture will use in situ extraction. I am skeptical about in situ extraction; isn't anyone else? For just one example, what fraction of the oil is recovered? How does that compare with the alternative of surface mining, in which the "dirt" is loaded into a truck and carried to an onsite factory. I have never seen recovery data for either method. An investor should be more than curious.

2008 Aug 27 07:33 PM

[Ab!:]

Guys don't worry about recoverable rate in two methods VintonCounty just mentioned. I work for one of those Oilsand companies and can tell you that the reserve estimates that companies publish are already accounted for smaller recoverable rate in insitu method comparing to mining method and thus should be considered as a credible estimates especially with improvements in insitu technology the recovery rate will increase over time. Soon I will be publishing new material in my blog and invite you to discuss some of today's important issues facing world economy. ibtalk.blogspot.com

2008 Sep 10 03:45 PM