1

FINE6150: Forecasting Assignment

Analysis of the Encana

Corporation Spin-off of
Cenovus Energy
Prepared for: Prof. Karen Chiykowski

Table of Contents

Executive Summary..................................................................................................... i
Industry Overview...................................................................................................... 1
EnCana Corporation: Company Overview...................................................................2
EnCana Corp: Capital Structure, Dividend Policy, Share Structure.............................2
EV/EBITDA Comparison............................................................................................... 2
Cenovus Spin-off Time Line........................................................................................ 3
Rationale for Spinoff................................................................................................... 3
Reorganization............................................................................................................ 5
Assets to EnCana (GasCo)....................................................................................... 5
Assets to Cenovus (IOCo)........................................................................................ 5
Balance Sheet...................................................................................................... 6
Deal Structure............................................................................................................ 6
Share value............................................................................................................. 7
Announcement May 2008..................................................................................... 7
Proceeding with Spin off September 10, 2009......................................................7

3
Shareholder value estimates September 10, 2009...............................................7
Multiples............................................................................................................... 7
Discounted Cash Flow.......................................................................................... 8
Actual Trading post split up Dec 3, 2009...............................................................8
Post Spin-off Performance.......................................................................................... 8
Share price performance after Spin-off......................................................................9
Conclusion did it create value................................................................................10
Appendices............................................................................................................... 11
Appendix A: Porter 5 Forces and Industry Risk Assessment..................................11
Appendix B: Encana Corporation Capital Structure Summary...............................12
Appendix C: EnCana and Cenovus Dividend Policy Review...................................12
Appendix D: Share Ownership at Announcement..................................................13
Appendix E: EnCana Valuation Analysis................................................................15
Appendix F: Benefits of the Spin-off......................................................................16
Appendix G: Location of assets to EnCana (GasCo)...............................................17
Appendix H: EnCana (Pre-Spin-off) Value chain.....................................................18
Appendix I: Location of assets to Cenovus (IOCo).................................................19

4
Appendix I: Location of assets to Cenovus (IOCo).................................................19
Appendix J: Breakup of Encana balance sheet into Encana and Cenovus.............20
Appendix K: Breakdown of shareholder value in May 2008...................................21
Appendix L: Proceeding with Spin-off in September 10, 2009...............................22
Appendix M: Shareholder value estimates September 10, 2009........................23
Multiples Approach............................................................................................. 23
DCF Approach.................................................................................................... 27
Appendix X: Actual Trading post split up - Dec 3, 2009.........................................30
Appendix X: Encana business unit performance...................................................31
Appendix X: Cenovus business unit performance.................................................31
Appendix X: Consolidated Financial Performance Post Split..................................32
Appendix X: Combined post-split firm trading values does not demonstrate much
change in shareholder value................................................................................. 33
Appendix X: The TSX has outperformed the combined firms since the split in 2009.
.............................................................................................................................. 34
Appendix X: Monthly total returns of the independent firms are less volatile THIS
IS MARGINAL, remove/restate...............................................................................35
References................................................................................................................ 36

Executive Summary
EXEC SUMMARY HERE

Industry Overview

The Oil & Gas Industry in North America in 2008 was riding an all-time high,
driven by soaring commodity prices.

(1)

In addition, all indications are that the

industry will continue to grow based on international demand for oil and domestic
demand for natural gas.

(1)

These high commodity prices are driving producers to

consider previously commercially unviable reserves, such as shale gas.

In the

natural gas market, it is expected (in 2009) that the growing demand will outplace
the massive reserves that shale gas represents.
Given the intense capital investment nature of the industry, the sector is
dominated by large international firms. In North America, a small group of large
scale producers lead the market including: EnCana, Exxon Mobile and Imperial Oil. (1)
In addition to the large leaders, the market is populated by second tier players.
Despite the varying size of the firms in the industry, there is one truth in the
industry that profitability is tied back to reserves quality and production rates. (1)
The industry structure is described via a Porter 5 forces in Appendix A.
However, the highlights of this analysis show that there is a high degree of rivalry
within the industry (due to the fact that firms must constantly seek out new
reserves) and a low threat of new entrants (due to the intense capital investments
required).
Lastly, a high-level industry risk assessment is presented in Appendix A.
Although the industry is rife with potential risks, the single biggest external
determinant of risk is commodity pricing.

(1)

Swings in commodity prices can have

2
massive impacts on the profitability of the firms within the industry.

This is an

especially concerning issue, as the firms have little to no ability to offset this risk,
given the massive capital outlays required to get reserves to the production phase.
Firms are typically required to run production when a site reaches maturity,
independent of commodity pricing, with output only being controlled. (1)

EnCana Corporation: Company Overview

Company details Sean

EnCana Corp: Capital Structure, Dividend Policy, Share

Structure
Prior to the spin-off Encana Corp. had a debt-to-equity ratio of 0.46

(2)

and a

targeted net debt-to-capitalization ratio of between 30 and 40 percent and a net

debt to adjusted EBITDA of 1.0 to 2.0 times at the time of the announcement of the
spin-off.

(3)

In 2008, prior to the Cenovus spin-off Encana paid a dividend of $1.60/share.

(4)

This was in-line with the dividend payout for 2007

(4)

, however EnCana has

stated consistently that it would flex dividends to maintain the desired capital
structure (5). Reviewing the Dividend ratio (Appendix B), it appears that despite the
statements in the annual reports to the contrary, EnCana was trying to maintain a
consistent dividend/share.
At the time the spin-off was announced, EnCana only had a single share class
and hence all shares were voting shares.

(6)

No information is available regarding

who owned shares at the time of the transaction, but as the issue was never raised

3
in the press, it is assumed that it was widely held, as it was in 2012 and 2010
(Appendix D).

In addition, in reviewing the notes of the 2008 and 2007 annual

report, no risks associated with a majority shareholder or controlling interest was

highlighted. (2) (4)

EV/EBITDA Comparison

NEEDS WORK
At the time of the announcement of the deal the Encana shares were
underpriced with a EV/EBITDA valuation of 16.38 as compared to 18.86 for its peers.
And the multiple further plummeted to 5.35 as compared to its peers multiple of
1.277 as of Dec-2008. We calculated the EV/EBITDA multiple for 2009 till 2011 and
found that significant value was realized for both the new entities. The Encana, had
a EV/EBITDA multiple of 91.69 in 2011 (but this was primarily due to an impairment
of $1 billion in the year 2011, but even if we consider the impairment into
consideration the multiple stands at 21.91) and Cenovus had the EV/EBITDA
multiple of 18.99. The EV/EBITDA multiple for the peers was 8.55 for the year 2011.

Cenovus Spin-off Time Line

The timeline for the spin-off transaction is noted above. Of note, EnCana was
able to raise enough funds through private offerings and new debt securities, that it
did not require bridge financing to complete the transaction.
Date

11-May-08 (3)

30-Sep-08 (7)

15-Oct-08 (8)

4-May-09 (9)

16-Jul-09 (10)

11-Sep-09 (11)

4
EnCana
announces plan
to spin-off oil
company

EnCana
announces the
name of new
gas company Cenovus
Energy Inc.

EnCana revises
schedule for
creation of
Cenovus
Energy due to
financial
markets
uncertainty

EnCana
completes
US$500 million
debt offering;
this allows
them to pay off
debt whose
convents does
not allow for
the spin-off

EnCana agrees
to sell non-core
Alberta
properties for
$632 million
(C$707 million)
to Bonavista
Energy Trust
with the goal of
improving the
value of their
portfolio
(divestiture
target of
$500M to $1B)

EnCana
announces
intent to use a
plan of
arrangement to
complete spinoff of Cenovus
Energy

18-Sep-09 (12)
EnCana
subsidiary
Cenovus
Energy
completes a
US$3.5 billion
private debt
offering.
Proceeds of the
private offering
will eliminate
the need for
the US$3 billion
bridge credit
facility.

1-Oct-09 (13)
EnCana holds
first Analyst call
focused on
Cenovus

29-Oct-09 (14)
EnCana mails
Arrangement
Circular when issued
trading in
EnCana and
Cenovus shares
to start
November 2,
2009

13-Nov-09 (15)
Financial and
operating
information
filed for
Cenovus
Energy and
post-split
EnCana

25-Nov-09 (16)
Shareholders
overwhelmingly
endorse plan of
arrangement
proposal

30-Nov-09 (17)
EnCana closes
transaction to
split into two
distinct and
independent
companies

Event

Date

Event

Rationale for Spinoff

EnCana spun-off Cenovus with the goal of creating value of shareholders. By

creating two independent companies, each with its own management and
strategies best suited for its operations, the ability to increase the shareholder value
was maximized

(3)

. The general thesis behind this value creation relates to the

underlying assets of the firm, specifically the properties.

When the spin-off was

proposed, EnCana owned two distinct set of assets: 1) unconventional gas reserves,
such as shale reserves, which are much harder to develop into production capable

5
sites 2) Conventional gas and oil (both on shore and offshore) reserves and oil
refineries (18). The basic logic behind the spin-off was that in order to maximize the
return on these assets, there needed to be different operating practices, different
capital management practices and focus from management.

This rationale is

supported by the fact Natural gas is a North American continental market business,
with limited shipments overseas. (19) There is considerable price volatility in the
business as unconventional sources of North American gas may be realized in the
near future, driving down prices. (20) In contrast, the Canadian oil sands are a
relatively stable resource with well defined reserves. Price is also a major point of
uncertainty, but unlike with gas there is no source of oil that may enter the market
at a lower price point price is primarily a factor of demand. (21) The oil sands also
have a better established international distribution network.

It was felt that the

only way to achieve this result was through a spin-off (more akin to a split) of the
company.
The spin-off would result in EnCana focusing on unconventional Natural gas
reserve development, while a new firm (eventually named Cenovus) would focus on
oil (offshore as well as oil sands) and traditional gas reserves.

These two firms

would be lead by EnCanas existing CEO and CFO respectively. (3)

Lastly, the spin-off would offer Encana stakeholders several advantages. First,
shareholders could elect to own the business and the risks that suited them, instead
of accepting both the business model risks at once. The division also removed
transfer pricing issues, as the oil sands are a major user of natural gas in the
production process.
Based on the general rationale that the EnCana assets had a lot of value and
that the firm was somewhat undervalued, when compared to industry peers, the
most logical course of action was a spin-off or to stay the course. Selling off any

6
assets, when management believed the firm was undervalued, would not result in a
fair valuation from managements perspective.
Lastly, a series of additional supporting arguments for a spin-off are
presented in Appendix F.

Reorganization

The parent EnCana was divided along the operational lines to have minimal
impact to the employees, suppliers, stakeholders and day-to-day operations. Under
the proposed transaction, EnCanas Integrated Oil Division and Canadian Plains
Division will become IOCo. GasCo will contain the Canadian Foothills Division, the
USA Division, the Offshore & International Division and the midstream assets. (3)

Assets to EnCana (GasCo)

GasCo will represent about two-thirds of parent EnCanas current production

and proved reserves

(11)

. Parent EnCanas major operating divisions, Canadian

Foothills and USA, were retained to form a pure-play natural gas company, aimed at
growing existing high-potential resource plays in Canada and the United States (3).
GasCo has a portfolio of current and emerging resource plays in key basins in
Alberta, British Columbia, Wyoming, Colorado, Texas, Louisiana and offshore Nova
Scotia (Appendix X). GasCo will hold the companys portfolio of prolific gas resource
plays: CBM (coalbed methane) and Bighorn in Alberta, Cutbank Ridge and Greater
Sierra in British Columbia, Jonah in Wyoming, Piceance in Colorado and Fort Worth
and East Texas in Texas (3). GasCo also achieved some promising exploration results
in a number of North American shale plays, such as Horn River in British Columbia

7
and the Haynesville shale in Louisiana, plus the Mannville CBM play in central
Alberta, and these plays have the potential to add significant depth to the
companys strong portfolio of natural gas assets (3).

Assets to Cenovus (IOCo)

Cenovuss assets contain parent EnCanas Integrated Oil and Canadian Plains divisions and represent about
one third of EnCanas current production and proved reserves (11). Assets were transferred to Cenovus with a
focus on the development of parent EnCanas Canadian oil sands assets and refinery interests in the United
States, supported by a natural gas and oil production base in Alberta and Saskatchewan. Cenovus will also
capture the benefits of the full value chain (Appendix X) through EnCanas integration of two producing
upstream Alberta oil sands assets Foster Creek and Christina Lake, and two top-performing refineries at
Wood River in Illinois and Borger in Texas (Appendix X) (11). Cenovuss assets will also include successful
enhanced oil developments at Pelican Lake in northern Alberta (3).

Balance Sheet

Depicting the above asset transfer in dollar values indicate that the parent company
prior to transfer had total assets worth $47.25B (2). Post split up EnCana retained
$33.8B (5) worth of assets and $20.6B (6) was transferred to Cenovus (Appendix X).
The slight increase in the values of the assets for EnCana was due to the cash
($3.5B) (11) received from the sale of its oil sands asset to Cenovus while a portion
of the goodwill was transferred from EnCana to Cenovus. The increase in asset base
for Cenovus was due to the step up in upstream and downstream refineries cost
($2.3B) (6).

Deal Structure

Under the Split Transaction, EnCana shareholders received one new EnCana
Common Share and one EnCana Special Share in exchange for each EnCana
Common Share previously held (5). The book value of EnCana's outstanding
Common Shares immediately prior to the Split Transaction was attributed to the
new EnCana Common Shares and the EnCana Special Shares in direct proportion to
the weighted average trading price of the shares on a "when issued" basis. The
value attributed to the new EnCana Common Shares and the EnCana Special Shares
was $2,360 million and $2,222 million, respectively (5). The EnCana Special Shares
were subsequently exchanged by EnCana shareholders for Common Shares of
Cenovus, thereby effecting the Split Transaction (5). Also, a committed and fully
underwritten $3 billion non-revolving, 364-day, bridge financing was obtained from
RBC Capital Markets to partially fund the approximately $3.5 billion amount to be
paid by Cenovus to EnCana to acquire the Cenovus assets under the transaction
(18). The Split Transaction reduced EnCanas total Shareholders Equity due to a
reduction in Share capital of $2,222 million, a reduction in Retained earnings of
$4,902 million and a reduction in Accumulated other comprehensive income of
$2,096 million. However, EnCana received amounts due from Cenovus and invested
the net proceeds of approximately $3.75 billion in short-term marketable securities
(5).

Share value
Announcement May 2008

At the time of announcement in May, 2008, the closing share price of EnCana was
$85.93. Owing to the uncertainty and volatility of the global financial markets,
EnCana decided to delay the spin off until clear signs of stabilization returned to
financial markets (8).

Proceeding with Spin off September 10, 2009

Prior to the split up in September 2009, each shareholder who owned a share of
parent EnCana would have received $55.03 per share based on the closing share
price of EnCana on Sept 10, 2009 (Appendix X). The drop in price was primarily due
to the depressed state of the financial markets.

Shareholder value estimates September 10, 2009

Multiples

National Bank Financial (22) estimated the share value of Cenovus and EnCana
based on the Cash flow method and the NAV method. An Equal weight of 50% was
used and per share value was determined based on comparable multiples. EnCana
was valued at 6.0x Cash Flows and a P/NAV multiple of 1.2x was used. Based on the
two multiples, the par share price of EnCana was estimated to be $34.20. To further
account for valuation uncertainty, an additional discount of 0.7xNAV was factored
and hence EnCanas share price was determined to be $27.54/share (Appendix X).
Cenovus was valued using a P/CF multiple of 8x and a P/NAV multiple of 1.10x. After

10
accounting for valuation uncertainty (additional discount of 0.9xNAV), per share
value of Cenovus was determined to be $30/share (Appendix X).
Discounted Cash Flow

A DCF analysis was performed based on the cash flows generated by operations
transferred to Cenovus and the operations retained by EnCana. The consolidated
Free Cash flow based on operating cash flows and necessary CAPEX for the
Canadian Foothills division and USA division, both parts of EnCana (GasCo) was
$798MM (Appendix X). At an adjusted estimated growth rate of 6.50% (11) and
WACC of 9% (23), the intrinsic value was determined to be $33,395MM. After
accounting for liabilities ($17,465MM), the per share price of EnCana was
determined to be $22 (Appendix X).
The consolidated Free Cash flow based on operating cash flows and necessary
CAPEX for the Canadian Plains division and Integrated Oil division, both parts of
Cenovus (IOCo) was $612MM (Appendix X). At an adjusted estimated growth rate of
6% (11) and WACC of 7.87% (24), the intrinsic value was determined to be
$34,691MM. After accounting for liabilities ($11,372MM), the per share price of
EnCana was determined to be $31 (Appendix X).

Actual Trading post split up Dec 3, 2009

The stock price of the spun off companies did not appreciate much and the share
price of EnCana was $29.40/share and the share price of Cenovus was $26.75/share
(Appendix X). The aggregated value to share holder was $56.15 which was a
meager 1.02% increase from $55.03 (as of September 10, 2009), indicating that the

11
market was expecting the split up for quite some time and factored in the price
already.

Post Spin-off Performance

On December 1, 2009 EnCana split into two companies. Post split, the two new
companies appear to be on different business trajectories. After a significant decline
from 2008-2009, Encana revenues have not made a major recovery, stalling at
$8,467 in 2011, a 37% decline since 2008. Net income has also dropped, with a
corresponding decrease in profit margin. (Appendix X)
In contrast, Cenovus has experienced a faster revenue rebound, with 2011 revenue
nearly back up to levels that were experienced in 2008 for the operating units that
would be spun off into Cenovus in 2009. Net income has also shown positive
growth, although profit margin is lower than before. (Appendix X)
Operational improvements from divesting unrelated businesses, such as Encana and
Canovus, are often cited as reasons for a divestiture. Based on a consolidated view
of the two resulting companies, there is little evidence of operational improvements
from the split outweighing overall economic effects that have occurred over time.
Revenue, driven by gains in the Cenovus component of the consolidated
performance of the two firms, is approaching the high water revenue mark set by
the old Encana in 2008, indicating increased performance as well as a potentially
improving economic climate. However, expenses associated with recovering
resources and selling them have risen faster. Profit margin for the consolidated
reports of Encana and Canovus are still well below those reported before the 2009
split.
Balance sheet performance appears stable, with the two separate firms not making
significant changes to operating components of the business now that they have

12
parted ways. Long term debt to equity or long term asset ratios are both stable,
indicating that capital structure, on the aggregate, has not significantly changed.
(Appendix X)
A loan payable of $3,750 payable to Encana was placed on Cenovus balance sheet
upon separation. This was paid in the same year, 2009.

(6)

There appears to be no

ongoing relationship between the two companies. Not 100% why this was done

Share price performance after Spin-off

The Encana Cenovus split was handled by exchanging each share of Old Encana
for one share each of New Encana and Cenovus. This had the effect of significantly
decreasing the share price of Encana, from about $60 per share, which kept its
ticker symbol, to about $30 per share. Cenovus began trading at about $28 dollars
per share, valuing the combined entities at approximately $58, similar to the
combined companys previous level.
Based on the evolution of the companies share price since the split, the split of the
two firms does not appear to have increased shareholder value. On March 1 st, 2013,
the combined value of an Encana and Cenovus share was $51.06, a decline of
nearly $10 since just before the split.
Since the split, Encana has trended downwards, falling to a share price of $18.32 on
March 1st, 2013 and significantly underperforming the TSX Index. Cenovus, on the
other hand, has improved in value, rising to $32.74 on March 1 st, 2013.
On a consolidated basis, a shareholder of Encana just before the split would have
slightly underperformed the TSX as of March 1 st, 2013. Indexed to 100 as of
December 2nd, 2009, the TSX would stand at 108.4 on March 1 st while the pre-split
Encana shareholder would hold an indexed value of 90.5. This represents a loss over

13
the period of 14.9% percent. Inclusive of dividends, representing a total return
perspective, the loss falls to 6.0%.
Is there a relative valuation story?

Conclusion did it create value

text

14

Appendices
Appendix A: Porter 5 Forces and Industry Risk Assessment

PORTER

Industry Risk Assessment (1) (25)

Risk
Description
Commodity pricing fluctuations can have a
massive impact on a business ability to meet
profit targets; Lowering commodity pricing can
Commodity price fluctuations
also make an owned reserve commercial
unviable due to high development or production
costs
Commodity pricing typically done in USD,
resulting in F/X fluctuations representing a
F/X Exposure
potential risk for Canadian and Mexican
operations or US firms shipping overseas
Future financial performance is dependant on
Asset Depletion
firms' ability to replace reserves that are
constantly depleting
Reservoir Characteristics

Reliance on 3rd Party Operators

Environmental Regulation

Capital Requirements

Geological and reservoir characteristics vary by

site and can result in wide of production volumes
past success doesnt impact future success
Several firms reliant on 3rd party operators
(refineries, pipeline transportation, shipping
lanes), which can create delays to market
impacting cash flows
Consistent trend in the industry for more and
more regulation to be introduced; this increases
production costs and can potentially make
owned reserves not commercially viable (ex, risk
of anti-fraking regulations)
The industry is very capital intensive and a lack
of access to capital can have dramatic impacts
on an operator, specifically limiting their ability
to bring reservoirs to production phase

15

16

Appendix B: Encana Corporation Capital Structure Summary

EnCana
Cenovus

Debt-to-Equity Ratio
2007
2008
2009
(4)
0.46
0.39 (2)
0.47 (5)

2010
0.45 (26)

0.69 (6)

0.41 (28)

2011
0.5 (27)
0.37
(29)

Appendix C: EnCana and Cenovus Dividend Policy Review

Dividend Policy for Encana Before and After the Spin off
Before Spin-off
After Spin-Off
2008 (2)
2009 (6) (5)
2010 (28) (26)
2011 (29) (27)
Dividen Share Dividen Share Dividen Sahre Dividen Share
d
s
d
s
d
s
d
s
1.6 750.4
1.4 751.4
0.8 739.7
0.8 736.3

EnCana
Cenovu
s
.21*
* Dividends only for one quarter

EnCana
Cenovus

751.4

0.8

751.9

Dividend Payout Ratio

2008
2009
2010
20.17%
57.02%
39.29%
(26)
(2)
(5)
73.39%
(28)
15.91% (6)

0.8

2011
471% (27)
41% (29)

754

17

Appendix D: Share Ownership at Announcement

Institutional Holdings in Encana as of
December 2012 (30)
Total Institutions
Shares held by institutions
% of all shares

Institution Name

ROYAL BANK OF CANADA

WELLINGTON MANAGEMENT CO LLP
IG INVESTMENT MANAGEMENT LTD
JARISLOWSKY FRASER LTD
MANNING & NAPIER ADVISORS INC
HARRIS FINANCIAL CORP
HARRIS ASSOCIATES L P
MACKENZIE FINANCIAL CORP
INSTITUTIONAL CAPITAL CORP
CONNOR CLARK & LUNN INVESTMENT
MANAGEMENT LTD
CAPITAL GUARDIAN TRUST CO
TD ASSET MANAGEMENT INC
CAPITAL WORLD INVESTORS
CIBC WORLD MARKETS INC.

520
468,238,
553
61%

Total
Shares
45,818,6
26
25,196,1
07
21,950,6
63
20,818,5
50
18,789,0
50
18,106,2
16
17,948,9
47
16,423,6
23
16,240,3
87
13,353,4
51
12,045,7
26
11,767,1
96
11,650,0
00
11,589,1
54

Percen
t of
compa
ny
6.0%
3.3%
2.9%
2.7%
2.5%
2.4%
2.3%
2.1%
2.1%
1.7%
1.6%
1.5%
1.5%
1.5%

Chang
e in
Shares
319,57
7
5,764,8
69
924,62
5
4,053,0
18
3,566,0
50
663,83
3
486,80
0
976,66
1
246,43
6
1,696,8
94
1,101,4
76
2,179,8
32
3,000,0
00
128,73

18

10,676,5
94
10,190,3
61
10,081,1
14
8,540,00
0
7,875,03
2
7,605,30
2

INVESCO LTD
BANK OF NOVA SCOTIA
TORONTO DOMINION BANK
CAPITAL RESEARCH GLOBAL INVESTORS
BEUTEL GOODMAN & CO LTD
PRIMECAP MANAGEMENT CO

5,100,98
4
4,928,84
4

SAC CAPITAL ADVISORS LP

AGF FUNDS INC

RUSSELL FRANK CO

4,486,70
0
4,301,61
9

TETREM CAPITAL MANAGEMENT LTD.

3,733,48
2

MERCATOR ASSET MANAGEMENT L P

1.4%
1.3%
1.3%
1.1%
1.0%
1.0%
0.7%
0.6%
0.6%
0.6%
0.5%

8
329,78
7
1,091,7
12
324,87
2
1,035,0
00
648,34
4
-500
158,63
2
62,034
147,70
0
935,75
4
459,49
7

Institutional Holdings in Encana as

of March2011 (31)
Market Cap
# of institutions
# of funds
% owned by institutions
% owned by funds
% owned by insiders

Institutional Ownership

$23,922
763
1,133
71.9%
32.7%
0

Shares

Change

% of total
shares

As of

19

Royal Bank of Canada

Jarislowsky Fraser Ltd
IG Investment Management Ltd

37,278,
447
26,089,
071
24,887,
517

TD Asset Management Inc

19,380,
924
17,443,
097
16,996,
385
14,374,
559
13,408,
663
12,888,
757

CI Investments Inc.

12,655,
980

BMO CAPITAL MARKETS CORP.

Wellington Management Company, LLP
Goodman & Company Invest Counsel
Ltd
BlackRock, Inc.
McLean Budden Ltd.

Fund ownership
Vanguard Wellington Inv
iShares MSCI Canada Index
Vanguard Energy Inv
Vanguard Total Intl Stock Index Inv
Vanguard PRIMECAP Inv
DFA Intl Value I
Oakmark I
Principal Equity Income A
GMO Intl Intrinsic Value III
First Eagle Overseas A

4,190,2
97
8,265,4
42
4,363,3
00
1,940,6
16
-61,904
3,944,8
89
-26,878
1,850,3
00
1,749,9
12
468,55
0

March 31
5.1% 2011
March 31
3.6% 2012
March 31
3.4% 2013
March
2.6% 2014
March
2.4% 2015
March
2.3% 2016
March
2.0% 2017
March
1.8% 2018
March
1.8% 2019
1.7%

Chang % of total
Shares
e
shares held
7,166,7
04
0
0.98%
3,407,8
04 51,161
0.46%
3,284,6 318,10
39
0
0.45%
2,191,3 329,19
00
0
0.30%
1,825,0
00
0
0.25%
1,566,1 1,541,1
48
69
0.21%
1,340,0 200,00
00
0
0.18%
1,302,9
00
0
0.18%
1,317,8 137,10
00
0
0.18%
1,100,0
50
0
0.15%

31
31
31
31
31
31

February 28
2011

as of
03/31/2011
04/30/2011
03/31/2011
03/31/2011
03/31/2011
03/31/2011
03/31/2011
04/30/2011
02/28/2011
03/31/2011

20

21

Appendix E: EnCana Valuation Analysis

EnCana ratio analysis vs. industry competitors:

(30) (32) (33) (34) (35)

Ratio Analysis seems to indicate that EnCana is slightly undervalued when

compared to industry peers.
In addition to a ratio analysis, an EV/EBITDA analysis over time was
completed, which also appears to indicate that the EV/EBITDA ratio is tracking
below industry peers.

(34) (35) (36) (37) (33) (32)

22

23

Appendix F: Benefits of the Spin-off

The following are the benefits if the split up:

Eliminate holding company discount By creating two pure-play companies,

investors and analysts will be able to gauge the performance of the two
companies independently and can compare it with peers or industry benchmarks

resulting in an accurate valuation.

Independence and flexibility Each company with its own strategy and
objective can adapt to situations and respond to opportunities without being
held back by the parent company. As a result of this independence, the
companies can unleash its full potential and pursue unlimited possibilities. By
being independent, the company is flexible to adapt to changing situations and

respond to market conditions better.

Focused strategies Each company can have its own strategy that is best
suited to the industry and can pursue the strategy without any interference from
parent company.

Each of the companies can pursue its own growth

opportunities independently.
Disciplined CAPEX investment Often when two or more operations are run
simultaneously, business units get preferential treatments and as a result certain
assets are treated core and non-core. This results in under investment of noncore assets. By splitting the 2 companies this partiality in investment is
eliminated and each of the two companies can invest effectively in CAPEX and

operational improvements.
Management Expertise By splitting the two companies, each company can
attract and retain talent that is best suited for its operations. Also, by having the

24
expertise in running the business, the ability to create future success is

maximized.
Shareholders value creation By having ownership in both the companies,
Shareholders get a chance to share the profits of the two companies and at the
same time diversify any market risks.

25

Appendix G: Location of assets to EnCana (GasCo)

Source: (38)

26

Appendix H: EnCana (Pre-Spin-off) Value chain

Source

(17)

27

Appendix I: Location of assets to Cenovus (IOCo)

Source:

(39)

28

Appendix J: Breakup of Encana balance sheet into Encana and

Cenovus

$20.6B

EnCana (2)
(Prior to spinoff)

EnCana (5)
(Post spin-off)

Cenovus (6)

Assets

47,247

33,827

20,552

Liabilities

24,273

17,213

11,372

Equity

22,974

16,614

9,180

Revenue

30,064

11,114

10,140

Net income

5,944

1,862

648

EBITDA/intere
st

24.27

16.24

13.88

All figures are in US$ millions

29

Appendix K: Breakdown of shareholder value in May 2008

Shareholder Value

IE
G
a
O
n
s
C
c
C
o
a
o
n
a

30

Appendix L: Proceeding with Spin-off in September 10, 2009

Shareholder Value

IE
G
a
O
n
s
C
c
C
o
a
o
n
a
* Sept 10, 2009 (Date of proceeding with divestiture) TSX Closing share price

31

Appendix M: Shareholder value estimates September 10,

2009
Multiples Approach
Source - (22)
Cenovus Production Profile

Source -

(22)

32
EnCana Production Profile

Source -

(22)

NAV Estimates

Source -

(22)

33
Proforma Estimates

Source -

(22)

Natural Gas Comparables

Source -

(22)

34
EnCana and Cenovus Price Summary

Source -

(22)

Shareholder Value

C
S
E
h
n
e
a
c
n
r
a
o
e
n
v
a
u
h
s
o
l
d
e
r
* September 21, 2009 Based on National Bank Financial Valuation (22)

35
DCF Approach
EnCana (GasCo)
EnCana (GasCo)
Canadian Foothills
Division
Revenues, Net of
Royalties (MM)
Expenses
Production and mineral
taxes
Transportation and selling
Operating
Operating Cash Flow *
CAPEX*
Canadian Foothills
Canada
Total CAPEX

2008
$4,35
5

33
239
609
3,474

2299
1901
4200

USA Division
Revenues, Net of
Royalties (MM)
Expenses
Production and mineral
taxes
Transportation and selling
Operating
Operating Cash Flow *

2008
$5,62
9

370
502
618
4,139

CAPEX*
USA

2615

Total CAPEX

2615

EnCana Consolidated Free Cash Flow

Operating Cash Flow
7,613
CAPEX
6815
NWC
0
Free Cash Flow
798

Intrinsic Value(MM)

6.50
%
9%
$33,9
95

Assets (MM)

Balance Sheet
$33,9
95
Liabilities (MM)

Growth Rate
WACC

Equity (MM)

Stocks Outstanding (MM)

$17,4
65
$16,5
30
$33,9
95
750.4

36
Per share price
* Source -

$22

(2)

Cenovus (IOCo)

Canadian Plains Division

Revenues, Net of
Royalties(MM)
Expenses
Production and mineral
taxes
Transportation and selling
Operating
Operating Cash Flow *
CAPEX*
Canadian Plains
Canada
Total CAPEX

Cenovus
2008
$4,41
8

74
392
484
3,468

847
1250
2097

(IOCo)
Integrated Oil Division
Revenues, Net of Royalties
(MM)
Expenses
Production and mineral
taxes
Transportation and selling
Operating
Purchased Product
Operating Cash Flow*
CAPEX*
Integrated Oil Canada
Downstream Refining
Total CAPEX

2008
$10,2
88

1
571
732
8,609
375
656
478
1134

Cenovus Consolidated Free Cash Flow

Operating Cash Flow
3,843
CAPEX
3231
NWC
0
Free Cash Flow
612
Growth Rate
WACC
Intrinsic Value(MM)

6%
7.87%
$34,6
91

Assets (MM)

Balance Sheet
$34,6
91
Liabilities (MM)
Equity (MM)

Stocks Outstanding(MM)

$11,3
72
$23,3
19
$34,6
91
750.4

37
Per Share Price
* Source -

(2)

Shareholder Value (Based on DCF)

C
S
E
h
n
e
a
c
n
r
a
o
e
n
v
a
u
h
s
o
l
d
e
r

$31

38

Appendix N: Actual Trading post split up - Dec 3, 2009

C
S
E
h
n
e
a
c
n
r
a
o
e
n
v
a
u
h
s
o
l
d
e
r
* Dec 3, 2009 TSX Trading price

39

Appendix O: Encana business unit performance

EnCana

2008PF

2009PF

2010

2011

Performance
Revenue

13,505
Net income

6,732

8,467

749
25%

8,870

3,405
Profit margin

1,499
11%

128
17%

2%

SOURCE?

Appendix P: Cenovus business unit performance

Cenovus

2008PF

2009PF

2010

2011

$ 10,140

$ 12,973

$ 15,696

Performance
Revenue

$
16,559

Net income

$
2,368

Profit margin
SOURCE?

14%

648
6%

993
8%

1,478
9%

40

41

Appendix Q: Consolidated Financial Performance Post Split

Source?

Consolidated

2007

2008

2010

2011

Performance
Revenue

$
$ 21,700

$ 30,064

Expenses

21,843

24,163

$
$ 16,879

$ 21,487

Earnings before taxes

18,620

21,954

$
$

4,821

8,577

Net Income

3,223

2,209

$
$

3,959

5,944

Long Term Assets

2,492

1,606

$
$ 42,530

$ 41,645

Long Term Liabilities

50,486

47,274

$
$ 19,940

$ 20,379

Equity

Profit Margin

23,505

24,174

$
$ 20,704

$ 22,974

22%

29%

27,349

25,730
15%

9%

42

LT Liabilities / Equity

0.96

0.89

0.86

0.94

Assets

0.47

0.49

0.47

0.51

ROA

11%

13%

n/a

3%

ROE

23%

29%

n/a

6%

LT Liabilities / LT

43

Appendix R: Combined post-split firm trading values does not

demonstrate much change in shareholder value
$120

$100

$80

Share price,
C$

$60

Cenovus Closing Price

Combined Closing Price
$40

$20

$0
4/19/2001 10/10/2006 4/1/2012
7/24/1998 1/14/2004 7/6/2009 12/27/2014

SOURCE

Encana Closing Price

44

Appendix S: The TSX has outperformed the combined firms

since the split in 2009.
160

140

120

100

Index,
Encana Index
Dec 2 2009 = 100

80

Cenovus Index

TSX Index

Consolidated Firm Index

60

40

20

0
7/6/2009

SOURCE

8/10/2010

9/14/2011

10/18/2012

11/22/2013

45

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