EnCana Corp. (ECA): Split-up to test our own vs. management's sum-of-parts view - Goldman Sachs - May 12, 2008
What's changed
EnCana announced that it plans to split into two separate companies, one to focus on unconventional natural gas and the other to be an integrated oil/natural gas company. The former company will comprise most of EnCana’s high growth unconventional resource plays, while the integrated oil will consist of the company’s oil sands, refining, shallow gas and various other, mostly oil weighted, Canadian upstream assets.
Implications
We rate EnCana Sell relative to an Attractive coverage view – we are quite bullish on E&P stocks given our well above consensus oil and natural gas forecasts, although we see less upside for EnCana than for other E&Ps. Our Sell rating on EnCana has reflected our view that the company’s valuation appears closer to the sum of the parts than obviously is the view of management in proceeding with this transaction. While we remain Sell rated, this transaction will provide the Street with an opportunity over the next eight months to revisit its views on EnCana's valuation – and ultimately reach a verdict – as the deal is effected. In this regard, we view the transaction positively, as we recognize that it is, in general, easier in the present market to receive premium valuations as a pure-play versus a diversified company – something we do not see changing as long as resource scarcity and growth visibility continue to be key issues for investors.
Valuation
There is 12% potential upside to our unchanged $95 12-month, DCF-based target price for EnCana versus 24% upside for E&Ps.
Key risks
Key risks to our target price include commodity price volatility, cost pressures, drilling results and government pronouncements. |
