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ANALYSIS: Clearwater is still a little murky, but the picture of profitability it forms is already quite clear.
Encana Corp. disclosed some details after markets closed on Monday regarding its plans to launch an initial public offering (IPO) of its Clearwater royalty assets in southern Alberta. With no information contained regarding the amount of money the company - to be called PrairieSky - will raise in its offering, the announcement provided just enough to breed some excitement across Canada's energy patch.
"It's a bit of a process," Jay Averill, spokesperson for Encana, told BNN. "[The price/proceeds] will come in a few weeks, after there has been a roadshow."
As the PrairieSky management team embarks on its first investor pitch tour, analysts have just enough data to start building some hype. Through the preliminary prospectus Encana filed Monday, analysts learned how much the Clearwater asset - which spans an area about the size of New Jersey (5.2 million acres) in southern Alberta and produces mostly natural gas liquids - is really worth.
Earnings before interest, taxes, depreciation and amortization (EBITDA) was approximately $245-million, well ahead of every analyst estimate made prior to Monday's disclosure. Phil Skolnick at Canaccord Genuity calculates a potential valuation ranging from $3.3-billion to $4.8-billion with a mid-point market cap of about $4-billion. Even at the bottom of that range, PrairieSky is now expected to be worth more than double initial estimates set by analysts when the plan was announced last year.
The new company is also not expected to spend any of its own money on exploration or development, unlike Freehold Royalties, which had previously been cast
as the currently operating model PrairieSky would most likely copy. By farming out the actual production work to third parties, PrairieSky will need only
to sit back, collect its royalties and in term disperse them to income-hungry investors.
No debt and monthly dividends are what await investors in this new entity when it hits the public markets likely sometime in early June.
"The goal," RBC's Greg Pardy wrote in a note to clients on Tuesday, is "preserving financial flexibility." Pardy said those monthly disbursements would equate to an 85% payout ratio in 2013, implying there is plenty of room to increase the dividend in the future.
Encana is also taking no chances when it comes to the folks who will be in charge of keeping PrairieSky reaching for the… clouds. CEO Andrew Phillips is the former chief executive of Home Quarter, CFO Geoff Barlow previously had the same title at Chinook Energy and Husky Energy and the board of directors will be led by former UBS Securities Canada chair James Estey.
"Pent up demand" for the PrairieSky IPO was strong even before the market learned what it will be worth or how the immense experience of the management team.
"From discussions we have had with the buy side, we believe many are doing what homework they can on Clearwater," Dirk Lever, managing director at AltaCorp Capital, told clients in a note published midday Monday, about seven hours before Encana filed its preliminary prospectus for PrairieSky. "We believe retail and institutional demand for Clearwater will be strong for a well telegraphed and anticipated Initial Public Offering."
Encana CEO Doug Suttles first announced this plan as part of his broader turnaround strategy last November. After getting just a hint of what the company stands to make from simply putting a minority stake up for offer, it begs the question why someone at Encana didn't propose this plan even sooner.
Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter