Thursday, November 26, 2009

EnCana: Suiciding on North American Natural Gas

Recently Devon Energy announced that it will sell its offshore and international assets to concentrate on onshore domestic natural gas plays.  Now comes the shareholder approval of EnCana's plan to split into two companies, EnCana, which will focus on North American natural gas, and Cenovus Energy, which will hold the company's oil assets.  EnCana becomes another company de-diversifying into North American natural gas. 

This was a move to appease investors who didn't value the hybrid oil/natural gas company as highly as they would if they were two pure play companies.  It also creates the opportunity for one or both of the businesses to be acquired, which would also boost shareholder value. 

I just wonder about the move from a business plan perspective.  This split, which has been in the works for more than a year, comes at a time when gas prices are sucking wind and don't see much light at the end of the tunnel.  In fact, EnCana doesn't see gas prices above $5.50 in 2010 or above $6.50 for the foreseeable future.  Companies like EnCana and Devon seem to see the benefit of re-creating their businesses around mass producing gas in a factory-like, low cost environment. 

To me it is another indication how shale gas has changed the natural gas industry almost overnight.  It seems to have furthered the trend for the domestic natural gas industry to move from a highly fragmented base of small independent producers to fewer, larger companies that look more like the energy "majors" than their ancestors.

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