Globe & Mail (Canada): EnCana stock heats up: “Calgary - Royal Dutch Shell PLC is looking to bid for EnCana Corp., market speculators say…”: “"It would establish Shell clearly and squarely as the No. 1 natural gas producer in North America…”: Posted Friday 2 Sept 2005
By DAVE EBNER
Calgary - Royal Dutch Shell PLC is looking to bid for EnCana Corp., market speculators say, and one senior analyst predicts there is a 50-per-cent chance that Shell will make a major move in the next year.
"It would establish Shell clearly and squarely as the No. 1 natural gas producer in North America, by far the most lucrative market anybody would want to be in," analyst Fadel Gheit at Oppenheimer & Co. in New York said in an interview Thursday.
The idea of a Shell bid for EnCana has preoccupied energy traders and investors this week - "I don't know how serious it is but I've sure heard it a lot," said one Calgary broker - but such a scenario has rippled through the market sporadically over the past year or two.
Andy Corrigan, a Royal Dutch Shell spokesman in London, said the Anglo Dutch company doesn't comment on rumours. Alan Boras, spokesman for Calgary-based EnCana, said the same.
Stock of EnCana surged Thursday, rising $2.49 or 4.3 per cent to $60.70 on the Toronto Stock Exchange, pushed higher as the price of natural gas hit a new record in New York. With 860.2 million shares outstanding, EnCana's market capitalization was $52.21-billion at Thursday's close, just 1 per cent behind Royal Bank of Canada, which is in No. 1 spot on the TSX, at $52.81-billion.
Shell is a top producer of natural gas on a global basis, but it is only the sixth largest in North America, far behind Encana, which is No. 1. Devon Energy Corp. of Oklahoma City stands at No. 4, and Mr. Gheit said Devon is another possible option for Shell, though he said EnCana makes more sense and is the likelier target. "EnCana is the optimal size," Mr. Gheit said.
"It would just fit like a glove."
A source said Credit Suisse First Boston investment bankers have made recent trips between Amsterdam, where Shell has some of its main offices, and Calgary.
The restructuring of Shell this year has also led analysts and investors to believe the company will make a move. For the first time in its history, Shell can issue its own stock to help pay for a takeover. Mr. Gheit estimated Shell could pay $10-billion (U.S.) in cash and $40-billion in stock for a $50-billion bid, which compares with EnCana's $44-billion market capitalization in U.S. dollars. "The question is valuation."
That question is a huge one. Shell executives have said they are looking at potential acquisitions but on the smaller side, less than $10-billion. The company has said it would be difficult to generate value for shareholders with a major acquisition at current commodity prices.
Valuing EnCana is difficult because many of the company's drilling prospects exist in what it calls its "unbooked resource potential" - gas and oil that the firm hopes to add to proved reserves over the next year or so.
Using only current proved reserves, paying $50-billion for EnCana would translate to $3.20 per thousand cubic feet of reserves - a very high price.
Including both proved and unbooked, it would be $1.25 per thousand cubic feet, considered a reasonable rate.
In 2004, EnCana bought Tom Brown Inc. of Denver for $2.3-billion, which works out to about $1.90 per thousand cubic feet of proven reserves. It was criticized for overpaying, but the deal significantly increased EnCana's presence in the Colorado Rocky Mountains.
Looking at Tom Brown's daily production last year, EnCana paid the equivalent of about $40,000 a barrel, which is about the same valuation that Chevron Corp. recently paid for Unocal Corp.; EnCana at $50-billion would be about $70,000 a barrel.
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