Several energy companies have spun off various business segments over the last year arguing that this would help management focus on its core business and lead to an increase in shareholder value.
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I thought it would be a constructive exercise to review some recent spinoffs to see if the stated goal of improving shareholder value had been achieved. We can't come to any definitive conclusions using this exercise since it is still too early to make a definitive judgment. (For background on energy investing, read Oil And Gas Industry Primer.)
In November 2009, EnCana (NYSE:ECA) split into two separate companies through the split off of its oil sands, heavy oil, refining and other assets into Cenovus Energy (NYSE:CVE). EnCana kept most of the company's natural gas assets. Each shareholder of EnCana received one share in the new company.
The reasons given by EnCana management for the separation were the usual boilerplate justifications for any spin off or major reorganization - better focus, different strategies, as well as more transparency on valuation by investors.
Since that time, EnCana has been locked in a tight trading range as the stock has suffered in part by a shift by investors toward energy companies that are focused on oil. Cenovus Energy has drifted higher since the separation and is trading just below its 52-week high near $30 per share. The company is continuing to pursue operations in the oil sands in Canada and just received regulatory approval for an expansion at Foster Creek. The expansion will boost capacity to 210,000 barrels per day.
Ups and Downs
Another more recent spinoff occurred at Questar (NYSE:STR) on June 30, 2010. The company distributed to Questar shareholders one share of QEP Resources (NYSE:QEP) for every share of Questar owned.
QEP Resources is primarily an exploration and production company, but also has a field services segment that provides gas gathering and processing services in various oil and gas basins in North America.
QEP Resources is weighted towards natural gas with 66% of its revenue and 92% of its proved reserves in this commodity. QEP Resources has drifted down since the summer, and is trapped in a trading range as investors avoid stocks that have too much natural gas exposure.
Questar was left with businesses that have much lower earnings volatility due to the spin off. The company has a natural gas pipeline and natural gas distribution business that is heavily regulated by the government. Even Wexpro, which is Questar's remaining exploration and production business, operates with a utility-like return. Investors seem to like this business model, and Questar has moved higher since the spinoff and is trading close to a 52-week high.
There always seems to be some company involved in a spin off, either due to investor pressure or some internal dynamic. Although the intent is to create shareholder value, this value creation can take some time before being realized. (For related reading, take a look at Cashing In On Corporate Restructuring)
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