ENCANA CORP. $55 - New York symbol ECA

ENCANA CORP. $55 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 751.2 million; Market cap: $41.3 billion; Price-to-sales ratio: 2.1: WSSF Rating: Average) will split itself into two separate companies in December, now that shareholders have approved the plan. Break-ups like this help unlock hidden value, and generally lead to above-average results for a period of years. One company will keep the EnCana name, and will focus on unconventional natural gas. The other will operate as Cenovus Energy Inc. (New York symbol CVE), and will specialize in oil-sands projects, oil refineries and conventional natural gas. The new EnCana will account for about two-thirds of the company’s current production and reserves. Cenovus will account for the remaining third. EnCana will give its shareholders one new common share in each of the two new companies for every EnCana share they own. As well, investors will not have to pay capital-gains taxes until they sell their new shares. Initially, EnCana intends that the two companies’ combined dividends will equal its current annual dividend rate of $1.60 per share, for a 2.7% yield. Meanwhile, EnCana earned $1.03 a share in the third quarter of 2009. That’s down 46.4% from $1.92 a year earlier. Cash flow per share fell 25.9%, to $2.77 from $3.74. Lower oil and natural gas prices were the main reasons for the drop. Lower prices also prompted the company to scale back its production by about 10%, and put off investments in new projects. Following the break-up, the new EnCana will sell some of its less-profitable operations. These include its unconventional natural-gas properties in Wyoming. The sales could generate around $1 billion for the new company. As well, Cenovus aims to raise $500 million for new oil-sands investments by selling its conventional natural-gas operations. EnCana is a buy.

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