Update Encana (ECA)

01/04/2010 6:17 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

EnCana (ECA) formalized its split into two companies when it began trading as EnCana (ECA) and Cenovus Energy (CVE) on the New York Stock Exchange on December 9.

Shareholders in EnCana received one share of the new EnCana and one share of Cenovus for each share of the old EnCana they held before the split.

The transaction split the company’s oil and natural gas holdings with the new Cenovus getting the old EnCana’s oil projects and its established natural gas and crude oil production assets in Alberta and Saskatchewan. In addition Cenovus becomes the owner of the old company’s two oil refineries in Illinois and Texas.

The new EnCana, stripped of those oil assets, becomes a pure play natural gas company with production and development focused in unconventional natural gas shale formations in British Columbia, and in the United States in the Barnett, Montney, Horn River and Haynesville natural gas shale regions.

EnCana was lucky or smart enough to have hedged about two-thirds of its 2009 natural gas production at $9 per thousand cubic feet. Not too shabby when natural gas spent much of 2009 under $5 per thousand cubic feet.

What will the company do with that cash? Plus the $3.5 billion the new EnCana gets from Cenovus as part of the split up?

EnCana will be able to pay down debt and invest in the development necessary to avert expiration of its shorter leases in Haynesville and some other formations.

I think 2010 will turn out to be another tough year for domestic natural gas producers as the economic recovery won’t be strong enough to offset the downward force on natural gas prices exerted both by larger than expected supplies from unconventional sources and very cheap imports of liquefied natural gas.

But I’m keeping the stock in the Jubak Picks 50 portfolio because the long-term trend is still in favor of natural gas, which is a critical transition fuel in any attempt to lower carbon emissions and in playing catch up with electricity demand after years of under-investment in other kinds of base-load electricity generation capacity. As of January 4, 2010, the stock paid a 2.5% dividend yield.
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