Encana Corp. , which has been hammered as natural gas prices plummet, will continue to sell assets in an effort to convince investors the value of the company is much higher than they believe.
Randy Eresman, president and chief executive officer, has spent the past few years selling assets and forming joint ventures. The aim has been to fortify Encana's balance sheet and speed its production of fields it would otherwise be too costly to develop.
But on Wednesday, Mr. Eresman said the selling is far from over. At a time when basement-level natural gas prices have shredded revenues and wreaked havoc on share prices, Encana sees selling as a strategy to prove its worth.
"I believe that the … value of the company is not reflected by the stock price, and that we will demonstrate, if we need to, one play at a time, how much value exists in this company," Mr. Eresman said during the company's first-quarter conference call. "And we believe it to be a great deal more than the stock market reflects."
The deal-making streak will continue "as long as there is an opportunity to continue to demonstrate value," he said.
North America's natural gas companies have been reaching out to foreign partners for financial support so domestic companies can continue developing assets even as they close off wells because of low prices.
Mr. Eresman and many of his competitors hope liquefied natural gas exports will soon be able to bolster prices, and they want to be ready to participate in the market. But until investors see concrete developments there, executives like Mr. Eresman must look at other ways to increase the value of their companies.
Encana, with $2.4-billion (U.S.) in cash on its balance sheet today, aims to increase that number to $3-billion by year's end.
Much of that will come through smaller sales. Mr. Eresman ruled out selling North America's second-largest gas company as a whole, but said he will continue to put assets on the block until shareholders see it his way.
That will continue a trend that has seen Encana engage in a flurry of deal making.
In little more than a year, Encana has raised $951-million from selling North Texas gas production, $891-million from selling gas processing plants, $380-million from a joint earning agreement with Exaro Energy III LLC, $920-million (Canadian) from selling additional gas processing assets, $2.9-billion for establishing a partnership with Mitsubishi Corp. and a further $600-million from a joint gas-development deal with Toyota Tsusho.
With 10.9 million acres of land hosting oil, natural gas, and natural gas liquids, Encana still has plenty to play with.
But analysts say Encana is engaged in a tricky strategy. "You make the company more complicated, because you have all these side relationships," said CIBC World Markets Inc. analyst Andrew Potter.
Worse, he added, it hasn't worked – at least, not from the perspective of persuading markets. The day Encana announced the Mitsubishi deal, its shares fell 1 per cent.
That's not to say that the deals are a bad idea financially. Many recent gas industry joint ventures, including those entered into by U.S.-based Chesapeake Energy Corp. , have implied a gas value of $5 to $6 (U.S.) per million BTU. On Wednesday, gas traded at $2.07.
Still, it's clear the months ahead will be difficult. On Wednesday, Encana reported $1-billion in first-quarter cash-flow, but about half came from tax measures and gains from hedges (sales of forward production that have been made at higher prices). The hedge impact was dramatic: first-quarter market gas prices averaged $2.74; Encana received $4.58.
In a year, most of those hedges will disappear, pointing to a difficult future – one Encana acknowledged Wednesday in saying it intends to reduce output by 600 million cubic feet a day, or 18 per cent, this year. "It just highlights that this company still has a lot of challenges ahead," Mr. Potter said.
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