The idea that Encana might someday become the target of a takeover would have been unimaginable a few years ago, but ill-timed transactions and an energy downturn have put the company in a difficult position.
Encana once held a diversified portfolio of natural gas, oil sands, and refining assets that put it in the ranks of North America’s top energy companies.
When the financial crisis hit, Encana decided to spin off the oil sands and refining operations into a new company called Cenovus Energy.
At that point, natural gas looked like the better bet for the future. As we know, the market didn’t cooperate.
Shale production drove natural gas prices to multi-year lows and a wave of unprecedented global stimulus actions sent oil prices rocketing higher.
The board decided to bring in a new CEO and Encana reversed course once again.
In 2013 Encana started dumping gas assets and spent some big money on oil properties in the hottest new plays. WTI traded for more than $100 per barrel and pundits were tripping over each other to predict how high crude prices would eventually go.
With all this optimism in the sector, Encana made two huge bets in the oil patch at what turned out to be the top of the market. Those deals loaded up the balance sheet with debt, and the shareholders watched in shock as crude prices fell 60%.
Encana has cut costs, raised capital, and sold assets to get its debt level under control. Management has already reduced corporate expenses by US$300 million, issued $1.44 billion in new stock, and divested US$2.8 billion in properties.
The company began 2015 with US$7.8 billion in long-term debt and expects to reduce the amount by US$2.8 billion by the end of the year.
The efforts are buying the company time, but the market has to improve if Encana is going to make it.
WTI oil is sliding back towards $40 per barrel, and Encana just announced another $US 1.1 billion in asset write-downs, bringing the total impairment charges for the year to US$3.6 billion
During the third quarter, the company delivered cash flow of US$371 million but spent US$473 million on capital expenditures and another US$38 million on dividends.
That means the US$140 million gap had to be covered by proceeds from the asset sales.
Is Encana a target?
The company doesn’t have any long-term debt due until 2019, and it has the means to ride out the rout for a while longer, so there isn’t an impending balance sheet crisis to drive Encana into the arms of a suitor.
Having said that, negative cash flow can’t go on forever. If oil and gas prices are headed lower or are even destined to remain at current levels for an extended period of time, Encana’s future isn’t exactly rosy.
The company has a market capitalization of US$6.27 billion and finished Q3 with US$6.13 billion in long-term debt. That puts the minimum buyout value at about US$12.4 billion, which is a tidy sum.
One of the oil majors could easily pull it off, and Encana has a fantastic portfolio of assets, but the stock would probably have to retest the lows hit in late August before someone makes a move.