February 4, 2002; Encana Corporation A New Top Independent With Impressive Growth Prospects

The Encana deal was well received by investors judging by stock price action in the past week.  Though PanCanadian Energy offered an apparent premium to acquire Alberta Energy, PCX stock had advanced sharply just before the deal was announced.  Now AOG stock has gained much of the apparent premium and PCX stock has recovered from its initial reaction. 

We carry over our buy recommendation of PanCanadian Energy to Encana.  We add Encana to our Large Cap Natural Gas and Oil group where it offers attractive value at a McDep Ratio of 0.88 (see Table L-1).  Financial risk is low with a ratio of Debt to Present Value of 0.20.  Market cap of $13,800 million exceeds that of the previous size leader, Anadarko, by more than a billion dollars. 

On top of a solid quantitative appeal, Encana has the unusual growth prospects we saw in PanCanadian plus the unique appeal of Alberta Energy.  While railroad land grant properties are a jewel for PCX, a provincial military reservation is a jewel for AOG, which was once the provincial oil company.   The new company will be the largest independent natural gas producer in North America.  PCX also has rich gas reserves under development offshore Nova Scotia; AOG has the large Jonah gas field in Wyoming.  Internationally PCX has the large Buzzard discovery in the North Sea and AOG has growing oil production in Ecuador.  (We visited those properties in Ecuador before they were acquired by AOG.)

Management has a long record of distinction.  The expected chief executive, Mr. Gwyn Morgan, has made money for investors in AOG, which we have also recommended in the past.  The expected chairman, Mr. David O'Brien, orchestrated the long-anticipated restructuring of Canadian Pacific that we recommended prematurely further in the past.  Though we still do not know why PCX's chief executive, Mr. David Tuer, resigned unexpectedly a few months ago, we can see that his departure made moot any need to choose among two qualified chiefs for the new entity.

For a first crack at the numbers of the combined entity we project Next Twelve Months Ebitda for the period ending March 31, 2003 at more than C$3.3 billion (see table on next page).  Assessing a multiple of 8.3 times we estimate present value of more than C$20 billion.  Subtracting debt, dividing by shares and converting to US currency we estimate present value of US$33 a share, the same as our estimate for PCX before the transaction.

Thus, two familiar, successful companies are joining to form a single company that may become one of the better large cap energy investments of the next several years.  The McDep value is favorable, financial risk is lower than average, growth prospects are unusual in the industry and management is well qualified.