hey margin et al
maybe a different spin on something that has been discussed ad naseum here.
here's a different alternative that some companies have decided to do in the past... ok, i'm specifically talking about tobacco companies. historically these companies were flush with cash hand over fist. back then, there was only a finite number of investment opportunities in tobacco. the question then became - what do you do with the cash? 2 alternatives came to the forefront: buy back shares or issue dividends.
some whacky executives instead had a brilliant out of the box idea that perhaps they should look at diversifying and branching out. they then went into the consumer durable and non-durable market segments and the rest is history.
it takes great vision to do something like that. oil and gas is a finite industry with finite reserves. i would be very impressed if someone decided to lead the company into the next millenium and start up a brand new segment with the dollars present today. obviously this would be a highly risky venture but one which would pay incredible dividends. i know encana has done this to a certain degree (sagd, co2 floods, other emicible floods) but it would be impressive to move into another direction outside of the conventional/unconventional gas segment.
anyone else have any ideas on what they could do? or maybe just flame away... i bet tobacco shareholders were howling back in the day too.
Mean tto say:
Otherwise they should strive to increase the NAV of each share by growing their own business profitably AND/OR by combination of share buyback and increased dividends.
The relative combination of those items depends on economic and market considerations.
Have a great day. I have a few other things to do as well.
My best example of deworsification is Quixote.
They have a nice little business making crash barriers and truck mounted crash attenuators - they have huge market share and you can see their products on many highways and in many construction zones.
Trouble is they made too much money.
First they tried unrelated acquisitions - things like laboratory machines, artifical blood, even stenograph machines (no, I am not kidding). Then they thought they could acquire other companies in the road building and maintanance areas - de-icing, weather channels and warnings, traffic signs and lights.
The upsot is that NONE of these ideas paid off, they have peed away all their cash flow, and the market cap is about what is was 20 years ago.
Now they knew that their core business was slow growing and they already had most of it. And they wanted to grow. And they did gradually increase the dividend.
But since their ideas for putting the cash to work never did work, they would have been better off buying in shares, splitting, buying in shares, splitting again. For the monay they wasted each 1987 shareholder would have four times the shares at the same price as today and would be drawing four times the dividend.
So I guess the message is - a company should consider investing outside their core business only if the return on the new business they enter is ABOVE the return on the business they are running. Otherwise they should strive to increase the NAV of each share by combination of share buyback and increased dividends.
I think ECA is right on track. In fact their whole idea of a trust for about 20 Billion of their assets was to grow the NAV of each share. Only a change in tax code altered that plan. They will continue to explore creative ways to work for the shareholders. There will be a whole lot less worry about what they should be doing when share price moves through 50's to 60's and beyond.
Sorry for all the posts. It was the only was I could figure to pull a thread I wanted to comment on out of the muck.
Encana has solid in place reserves and the entire Oil Sands project to develope. I would prefer they deploy some capital in strategic ways rather than or along with acquisitions in 2007.
One interesting one would be to dabble in areas which might develope as long term competitive threats. Uranium. gasification, clean coal. There are still a lot cross benefits and it protects them if evolutions, regulatory pressures, or taxation protocols threaten them or make one of the alternatives more successful.
Big tobacco did score by using cash to buy non-related companies. But for every success like that there are dozens of cases of companies that faltered with "diworsification" into unrelated areas. (I think Peter Lynch used that term first or at least borrowed it and made it mor epopular)
Eresman will keep company tightly focused and I think that is good. There is plenty to do in the areas of their expertise.
They want to grow on shore non-conventional natural gas production in NA - mainly from resource plays where they have efficient reproducible development drilling strategy that is almost a "lean manufacturing" model for producing natural gas. They have at least a 20 year horizon for natural gas production.
They also have billions of barrels of bitumen from amazing oil sands asset. They have leveraged that to form two strategic partnerships with COP. They gave up about 35% of their oil sands asset (half of their two currently producing properties but not including Borealis) in return for 50% of two major refineries that are being expanded and modified to process the heavy oil.
They have a very nice strategy to exploit the oil sands by capturing entire process from producing gas for steam, producing the bitumen, blending it to with diluent (they have worked several years to put supply chain for diluent in place) and then refining it to finished product like gasoline. They profit at every step and avoid some of the gas price risk and heavy oil differential risk. They make money no matter what happens, just different amounts at different points of the process. They get nice cash flow from the refinery operation. They have at least a 20 year horizon on the oil sands to refinery to finished products business.
They have made it very clear that these are the two areas where they will focus. They have sold pipelines and gas storage, and liquid natural gas facilities and gulf of mexico production and assets overseas like North Sea and Ecuador and Brazil discovery and Chad. They planned a new building to get exactly what they need in terms of facilities but then sold it to real estate company as soon as the project was designed to perfectly meet their needs. They will do a small amount of exploration and will invest in infrastructure if they need it quickly - but they will monitize any non-core discoveries and will sell the infrastructure (ie pipeline extensions) as soon as they are up and running.
Since they have a 20 year horizon (maybe longer than mine) in both of their core areas I don't see that they need to buy un-related companies. The tobacco companies feared all the litigation and the eventual loss of their core business (that hasn't happened - isn't addiction wonderful). ECA is fine to just keep doing what they do well for the next few decades.
So how will they spend all the extra cash. For the shareholders. (that is the fiduciary responsibility of every public company but is sometimes forgotten). Again they have been totally straightforward.
They will spend it to increase NAV per share.
If gas prices are low and share price is low they will buy in shares and increase dividend.
If gas prices are high and share price is high, they will use it to increase production and increase dividend.
Simple and elegant. Repeated again and again by Eresman since he has been at helm. And every action of the company entirely consistent with overall strategy.
A few further ideas which you might even see them do.
If they are to branch out, why not branch into something which has benefits for the business anyway?
Invest in or create companies to provide housing, schools, roads and other infra-structure in the Oil Sands communities where cost-of-living is beyond belief and the local governments can't keep up.
Pipelines, pipeline companies, drilling rig companies.
Oil and electric conversion to Natural Gas companies.
There are lots of potential opportunities which are good business opportunities in their own right and have a kick-back benefit to Encana's core business.
Actually they have been selling off certain properties and may decide to sell more. And they were apparently planning to spin the company off into a trust, when the government decided to cancel the tax benefit of doing so.
Right now there do not seem to be any new investment opportunites, other than some certain real estate action. But I'm not sure what is really available. And the company seems committed to focusing on land assets in North America, not elsewhere.
I think it is a valid idea. The best returns are not by staying in that business forever. It is by divesting or selling the business off and capturing the benefits. Something like perhaps getting into real estate and then selling it off while keeping the gains for the company.
Makes perfect sense to me.