Encana Corporation (NYSE: ECA) has announced that it is splitting the company into two pieces.  The plan calls for the company to create an integrated oil company from both upstream and downstream assets, and a natural gas company. 

Shareholders will receive one share in each of the new companies in exchange for each share of Encana.  The natural gas company is expected to retain the Encana name and the combined dividends of the two companies will be set initially to $1.60 annually, equal to the company’s current payout. Encana plans to complete the split by early 2009.

According to the press release, Encana is taking this action in order to "enhance long-term value for EnCana shareholders by creating two highly sustainable, independent entities, each with an ability to pursue and achieve greater success by employing operational strategies best suited to its unique assets and business plans." Last year Encana signed a deal with ConocoPhillips (NYSE:COP) jointly to develop some oilsands properties and to refine Encana’s bitumen production in the United States. Separately, the company is expanding its oilsands processing capacity from 30,000 b/d to a planned 110,000 b/d by 2012.

In 2007, Encana sold off virtually all its non-North American assets. Its main assets now are 9 billion barrels of bitumen in the Alberta oil sands region, and about 19 TCF of natural gas, mostly coalbed methane. The company’s current president and CEO will head the new natural gas company, and the current CFO will run the integrated oil company.

Encana’s split recognizes reality. The company’s natural gas assets in the U.S. promise to be a growing source of revenue as the price increases for coalbed methane in the Rocky Mountain region. This should be a real moneymaker going forward.

Encana is leaving its integrated oil company with about 2 TCF of natural gas to burn to create steam for the company’s expanding in situ mining operations. That’s smart because it will help insulate the new integrated oil company from natural gas price hikes or shortages. The problems with natural gas supplies and, especially, water are well known in the oil sands region.

All in all, this looks like a good move on Encana’s part. And as we’ve suggested elsewhere, might be something big U.S. oil companies ought to be thinking about.  Encana shares are up over 5% pre-market at $90.75; its 52-week trading range was $55.13 to $87.69.

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Paul Ausick
May 12, 2008

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