CALGARY – Encana Corp. is cutting its workforce by 20 per cent, slashing its dividend and spinning off a huge chunk of its Alberta land holdings into a new public company as part of a “bold” strategy unveiled by its new CEO on Tuesday.
Since taking the reins in June, former BP executive Doug Suttles has signalled that huge changes would be coming for natural-gas focused Encana, which has long struggled with low commodity prices.
Suttles has previously said Encana would become a leaner, more profitable company under his leadership. On Tuesday he expanded on that, announcing Encana would focus on its five best resource areas across North America, instead of juggling 30 different ones.
Encana will be closing its Dallas-area office, which has roughly 400 employees, and consolidating work in Calgary and Denver. As of late 2012, Encana currently has just over 4,000 full-time employees, plus 900 contractors.
“We need to align our organization with our strategy, both in terms of scale and in structure,” Suttles told analysts on a conference call.
“Unfortunately the net result of this is we need a smaller workforce than we have today and will result in about a 20 per cent reduction to our current workforce.”
The job cuts should be mostly complete by the end of this year, Suttles said.
“It’s right across the range of skills we have in the company. So it will include technical skills such as engineers and geologists all the way through to our administrative support staff and some of our financial staff,” Suttles told reporters. “I think it’s probably most if not all disciplines that will have some impact.”
He recently announced a reorganization of the company’s management ranks, which included the departure of five executives.
Encana also announced that its quarterly dividend will be cut to seven cents from 20 cents per share — a move that had widely been expected.
“This is not the first place we began when we looked at strategy. We first believed that we needed to get our cost structures and efficiencies right,” said Suttles.
“The dividend must be sustainable through a volatile commodity price environment. We see the dividend as an important part of our total shareholder return and it’s important that we maintain a strong balance sheet and our investment grade rating.”
Also Tuesday, Encana said it plans to spin off about five million acres of land in the Clearwater formation into a new publicly traded company in which, at least initially, Encana will hold a majority stake.
Suttles was unable to divulge many of the details on the Clearwater plans, as Encana is preparing to take that company public around the middle of next year. He said he expects there to be strong interest in the initial public offering, as most of the cash flow from the royalty interest will be doled out to investors.
“This is incredibly immense. It’s a legacy asset of the company’s and it has a lot of potential in the future,” said Suttles.
“The intention of taking this public is to unlock the potential that this opportunity affords.”
Encana also plans on putting non-core natural gas assets on the sale block, but Suttles stressed that those divestitures aren’t necessary for his strategy to be successful. The company does intend to hang on to some of those properties though.
“We want to retain some of that because just as soon as you think you know what commodity prices are going to do, you find out you’re wrong,” said Suttles.
“A number of our assets are really, really well positioned if gas prices strengthened over the next few years and we’d want to invest into those.”
Encana expects next year’s capital spending to be around $2.5 billion — a bit lower than what it is spending this year.
About 75 per cent of that will be on five resource regions that offer higher returns because they are rich in oil and natural gas liquids. They include the Montney area in northeastern British Columbia and the Duvernay area in Alberta. The others are the DJ Basin, San Juan Basin and Tuscaloosa Marine Shale in the United States.
Credit rating agency Moody’s said it sees Encana’s new strategy as “positive,” as it will enable the company to live within its internally generated cash flow.
“Living within cash flow would be a significant positive step forward for Encana, which has typically relied on sometimes significant asset sales and joint ventures to fund negative free cash flow. We expect Encana to continue to reduce debt as it remains committed to maintaining investment grade credit ratings.”
Encana shares rose nearly five per cent to $19.51 in mid-day trading on the Toronto Stock Exchange.