Energy Ink

Encana divesting its remaining interest in PrairieSky spinoff

Other firms mull offerings for their fee simple mineral lands

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September 10, 2014

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After spinning out PrairieSky Royalty Ltd. in the biggest initial public offering of the past 14 years, Encana Corp. announced on Monday, September 8 that it would sell its remaining interest in the new company – at a price 30 per cent higher than the initial offering.

PrairieSky’s stock price, which debuted on the Toronto Stock Exchange at $28 per share on May 29, traded in the $35 to $36 per share range on Wednesday, September 10. The company’s secondary offering of 70.2 million common shares will be priced slightly above that range, at $36.50 each.

Through the PrairieSky IPO, Encana pulled in approximately $1.46 billion. Now, three months after the initial offering, Encana expects to raise another $2.6 billion in a secondary offering, which is expected to close on September 26, as Canada’s largest natural gas producer divests its remaining 54 per cent stake in the spin off.

Encana’s success with its PrairieSky Royalty IPO has inspired other major Canadian producers to consider spinning off their royalty properties as well. Canadian Natural Resources Ltd.’s president Steve Laut mused in June that his company is evaluating its properties and would consider following Encana’s lead, calling PrairieSky’s example “attractive.”

In a research note to clients, Michael Dunn at FirstEnergy Capital Corp. writes that “Encana continues to look extraordinarily inexpensive on both a [net asset value] basis and a cash flow multiple basis.” He adds that the company is currently undervalued by approximately $6.50 per share, and has a price target on the producer of $29 per share.

Encana initially spun off its royalty lands to refocus its business under new CEO Doug Suttles, who joined the company in June 2013.

For energy producers, managing royalty land holdings is fundamentally different than developing acreage leased from the provincial government. The difference is in surface and subsurface rights. Companies that have only surface rights to land packages do not own the minerals and hydrocarbons below the surface of the land, and energy producers must pay royalties to the government for the oil and gas extracted from those lands.

Royalty lands, more accurately described as fee simple mineral lands, confer upon the owner the rights to the minerals beneath the surface of the land. As a result, the owner of the land can demand royalty fees from any company looking to extract its minerals – or, in this case, hydrocarbons.

The ownership of these lands date back to early days of the Hudson’s Bay Company, when King Charles II of England gave 948 million acres of land to the company in 1676. The land was later ceded to the government of Canada and, after a time, granted to railway companies in exchange for the construction of a cross-country railroad.

Until 1971, Canadian Pacific Railway Ltd. owned the fee simple mineral lands recently spun out by Encana into PrairieSky Royalty. That year, Canadian Pacific Oil and Gas (a CP Rail subsidiary) merged with Central-Del Rio Oils to form PanCanadian Petroleum Ltd., which would itself later merge with Alberta Energy Company Ltd. to form Encana.

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