Globe and Mail: EnCana denies takeover: “Earlier, analysts at Merrill Lynch said it “would be a surprise” if Shell made an aggressive bid for EnCana at a time when the European energy giant is focused on improving the efficiency and profitability of its capital investments.”: Posted Friday 21 October 2005
By ROMA LUCIW AND DAVE EBNER
EnCana Corp. said Thursday it isn't in talks with anyone about a possible takeover and is “not aware of any intention by any party to make an offer to purchase.”
The company, whose shares jumped almost 10 per cent Wednesday on speculation of a takeover bid by Royal Dutch Shell PLC Shell, said in a statement that its “continued independence is the best way to create long-term value for shareholders.”
Shares of EnCana, North America's largest natural gas producer, fell $4.80 or 7.79 per cent to $56.85 in Toronto trading.
Earlier, analysts at Merrill Lynch said it “would be a surprise” if Shell made an aggressive bid for EnCana at a time when the European energy giant is focused on improving the efficiency and profitability of its capital investments.
EnCana trading volume surged to above 13 million shares in Toronto, more than three times the daily average.
Other Canadian energy stocks also fell sharply Thursday as the price of oil dipped below $60 (U.S.) for the first time since July. The S&P/TSX's capped energy sub-index dropped 5.76 per cent.
U.S.-based Merrill Lynch analysts John Herrlin Jr. and Bob Parija said they could understand why a major integrated company such as Shell would be considered a potential EnCana bidder, given that it wants a greater North American natural gas presence and its 2001 hostile bid for Denver's Barrett Resources Corp., also a gas producer.
“By the same token, most integrateds really don't like labor-intensive assets which are why companies like Royal Dutch sold billions of dollars worth of North American properties in the first place. And it would be a surprise to us if Royal Dutch were to make an aggressive bid when like other integrateds, it is focused on above-average return on capital employed (ROCE),” Merrill Lynch said.
Sources suggested on Wednesday that Shell—one of the world's top three energy companies—made a $65 (U.S.) a share bid for EnCana, which was rejected by EnCana as insufficient. Sources suggested Shell was considering a higher bid.
When EnCana was created in 2002 by the merger of Alberta Energy Co. and PanCanadian Petroleum, the intention was to “build a flagship, Canadian-headquartered energy company that would be one of the strongest in our industry,” EnCana CEO Gwyn Morgan said Thursday.
“EnCana has taken an important place in North American's energy supply, and has become a symbol of Canadian innovation and competitiveness. Today, EnCana is extraordinarily well positioned to continue to create long-term shareholder value while delivering on our corporate mission of providing energy for people.”
In a separate report, brokerage Tristone Capital Inc. conducted a detailed investigation of three of EnCana's core drilling areas in Western Canada and liked what it found.
“We value the full cycle potential of these plays at over $8 (U.S.) a share,” analyst Chris Theal said in the report. Tristone hiked its 12-month stock price prediction to $70 from $62.
EnCana shares traded in New York fell $4.01 or 7.63 per cent to $48.55 Thursday. Tristone rates the stock “outperform.”
The Merrill Lynch report, meanwhile, said that EnCana stock and the broader energy sector could give back Wednesday's gains if nothing comes of the takeover rumours.
“Our concern with such an eventuality is that [Wednesday's] stock move would belie the ‘where there's smoke, there's fire,' suggesting that there is still too much speculative money chasing too few ideas in the stock market,” it said.
If, however, Shell does make an official bid, it would be an admission that there are not enough compelling growth opportunities abroad, Merrill Lynch said. That admission would in turn have consequences for the entire industry.
Merrill Lynch is “neutral” on EnCana and has a U.S. stock target of $52.56.
Jim Buckee, chief executive officer of Calgary-based Talisman Inc., an EnCana rival, doesn't think major energy companies are interested in the type of assets that EnCana has. EnCana drills about 5,000 wells a year, more than anyone in North America, aiming to add a small amount of gas to its production with each effort.
“The sort of assets the majors like tend to be bigger and chunky and require big investments,” Mr. Buckee said in an interview after his company today announced a $2.5-billion (Canadian) deal to buy North Sea oil producer Paladin Resources PLC.
“These myriad of smaller investments I think is not really their cup of tea.”
Devon Energy Corp. of Oklahoma City, an EnCana peer, could be a likelier target for Shell. In September, analyst Fadel Gheit at Oppenheimer & Co. in New York said there are 50-50 odds that Shell makes a big move in the next year, either for EnCana or Devon.
Devon would be a smaller bite for Shell. EnCana's market capitalization today stands around $42-billion (U.S.), while Devon is at $26-billion. Mr. Theal said that the EnCana board of directors is unlikely to accept any offer for less than $60-billion.
If Shell offered Devon a 25 per cent premium, the cost would be about US$33-billion.
EnCana is the No. 1 producer of natural gas in North America and Devon stands at No 4, with Shell trailing at No. 6. However, a Shell-Devon combination would easily vault past EnCana.
Mr. Gheit described the North American gas market as “the most lucrative market anybody [in energy] would want to be in.”
Natural gas is mostly a continental market, unlike oil, with North American gas prices radically higher than those seen internationally. The benchmark gas price on the New York Mercantile Exchange is about $13 per thousand cubic feet, far higher than the average of $6 this decade, prior to hurricane Katrina. Internationally, gas is often sold for $2 to $4.
Shell is a leader in international gas and liquefied natural gas. As LNG market expands and more imports come to North America, industry players expect the longer term price of gas in Canada and the United States to settle roughly in the $5 range.
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