‘Encana twins’ don’t look alike
The Encana twins, Encana and Cenovus, released first-quarter numbers Wednesday that showed the diverging paths being taken by each company by virtue of commodity exposure.
For fans of Roman mythology, one could think about these companies as being the energy sector’s version of Romulus and Remus, twins who, according to legend, were the founders of Rome. Both, however, don’t survive — with Remus being killed as a result of the disagreements regarding where Rome should be built.
The fact Encana and Cenovus decided to hold their annual general meetings at the same time but in different rooms at the Telus Convention Centre on Wednesday could be interpreted as a sign of quiet discord.
Encana chairman David O’brien answered that very question from the podium during the company’s AGM, saying it was pure coincidence. But the fact is Cenovus had scheduled its meeting before Encana and one would think someone would check an AGM schedule for conflicts before setting a date. In this case, with overlapping shareholders as a result of the Cenovus spinoff, it would have been particularly important.
Not only did the scheduling result in lacklustre turnout for both companies, the more important issue is that it didn’t make it easy for the media or the financial community from a coverage perspective. For the record, U.S. energy players seem to do a better job of ensuring the meetings are more spread out.
Aside from the inability to be in two places at one time, the story coming from the companies was decidedly different.
Encana, despite posting a profit of $12 million compared with a loss of $361 million for the same period last year, is in a tough spot.
Without the benefit of hedging gains, asset sales, joint-venture agreements and tax gains, cash flow would have been almost half the sum of the capital expenditures and dividends. As an added worry, if natural gas prices remain soft into 2013, when Encana doesn’t have hedges to shore up cash flow, things could become quite challenging even as it moves to increase its liquids production.
Where it does have opportunity to offset commodity price exposure is in the pursuit of more joint-venture transactions, like the deal announced last week with Toyota Tsusho involving natural gas wells.
But here’s something to ponder: With Encana valued at $13.5 billion, the question inevitably comes up as to whether the company is a takeover target. Eresman stated emphatically Wednesday there were no plans to sell the company.
Although some might think it’s an inevitability — as gas prices remain low and companies with deep pockets look to translate cash into hard assets — it’s not so simple. Why? Because of the joint venture agreements in place.
Truth is, while they do de-risk the company’s exposure and take the heat off from a financial perspective, taken together they function as a poison pill of sorts because they make valuing the company a little more complex.
In addition, while Encana might like its joint venture partners, there’s no guarantee a suitor would feel the same way about the existing agreements.
Cenovus, meanwhile, told an entirely different story, one of strong earnings and cash flow numbers and higher production compared with last year. It also trumpeted the enviable margins from the refining side of its business that offset the effect of the widening differentials which hit Canada’s heavy crude production this quarter. Were this not in place, the results from Cenovus would have been decidedly different.
While the company said its joint venture process for Telephone Lake continued, there were no announcements regarding firm deadlines.
The process has been going on a while, and the market appears to be losing some patience, but Cenovus has the luxury of choosing a deal it wants, with the partner it wants and when it wants. It’s not something needed to free up cash flow for something else.
Looking at the results from both companies, there’s no question Encana faces the tougher road ahead; one wonders what the atmosphere will be like when the two find themselves under one roof in The Bow tower later this year.
If anything, the tale of Encana and Cenovus, as laid out Wednesday, once again raised the question of whether the split was the right decision. After abandoning the oil and liquids side of the business, Encana is now scrambling to build a balanced asset base to generate cash flow and reduce future vulnerability. It’s classic portfolio theory — and probably should have been heeded back in 2009.
Eresman made a cautiously optimistic case for an improvement in natural gas prices in the latter half of the year and into 2013. Whether he is right remains to be seen. If not, there could very well be only one twin next year — and only one shareholder meeting.