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only this weekend, Royal Dutch Shell pulled out of an Iranian gas project

Financial Times: EnCana break-up

Published: May 13 2008 03:00 | Last updated: May 13 2008 03:00

Note to oil executives: expect a slew of calls from investment bankers touting multiple iterations of the “EnCana case study”. The 8 per cent jump in the Canadian oil and gas group’s stock price on news it is to split itself in two will make sure of that.

EnCana’s move is smart and well-timed, raising the classic “sum-of-the-parts” argument to push for a higher stock price. It is not really the case that EnCana’s current structure obscures its operations. Rather, as separate North American gas and oil sands development businesses, it can market itself to distinct sets of investors. Those with a penchant for gas, for example, will welcome not having to read up on the complexities of mining and refining oil sands, and associated exposure to the threat of tighter carbon dioxide legislation. Moreover, high-cost oil sands operations are much more exposed to any drop in the price of crude – and, on the flip side, leveraged to continuing price strength.

EnCana, with an enterprise value approaching C$80bn, is also creating two smaller mouthfuls. Resources close to home look ever more tempting to western energy companies at a time of rising resource nationalism – only this weekend, Royal Dutch Shell pulled out of an Iranian gas project. As an alternative, the energy groups’ balance sheets can be put to work on developing unconventional fields in North America, such as gas shale and tar sands, which promise big reserves but require huge upfront investment.

ConocoPhillips, already in a joint venture with EnCana’s oil sands operations, is one potential suitor for that division but it might face competition from BP or Shell. On the other side, ExxonMobil has been quietly expanding in unconventional gas resources. Besides pressing EnCana’s peers to follow suit, bankers will be happily touting the two new companies as takeover targets.

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