Encana’s Flickering Flame of Hope by the Wall Street Journal, January 14, 2013
EnCana’s stock jumped initially on Monday morning, before fading. The hope is that Mr. Eresman’s departure heralds a radical change in strategy.
Yedlin: CEO’s departure comes as no surprise by Deborah Yedlin, January 12, 2013, Calgary Herald
To followers of Encana, the abrupt announcement Friday that chief executive Randy Eresman was retiring from the company shouldn’t have come as a big surprise. Under Eresman’s watch, Encana has gone from market darling to market goat – with continuing questions about the decision to spin off the company’s oilsands assets into a separate entity, which is how Cenovus came to be. A look at the market valuations of both companies as of Friday’s close tells a big part of that story. Encana was worth $14.4 billion while Cenovus closed the day valued at $25.3 billion. At the time of the spinoff, there were as many observers who said having a pure play natural gas company was too risky – because there was no offset if natural gas prices fell – as there were those who said it would garner a better valuation if it was a pure play on one commodity. When Encana was created through the merger of AEC and PanCanadian in 2002, there were two individuals vying for the chief operating officer spot: Eresman from AEC and Dave Boone of PanCanadian. Eresman was then Encana CEO Gwyn Morgan’s choice to succeed him and thus was appointed to the COO slot. Eresman was seen as being very strong from an operating perspective, although not everyone was convinced it was the right move – and Boone left.
The next step for Eresman was CEO. From his first public speech, Eresman didn’t appear comfortable in a role as public as that of CEO, which he assumed when Morgan retired in October 2005. He wasn’t the guy, as someone said recently, to be selling Encana to a group larger than one that could fit around a boardroom table. And whereas Morgan made himself accessible to the media, Eresman was more reticent to follow suit. That may not seem important, but a company that doesn’t build credibility when times are good gets penalized when things go sideways. And that’s what happened at Encana.
Someone who knows Eresman said he was an “extraordinary value creation guy because his strength on the operating side translated into an ability to fine-tune businesses, boost the company’s competitiveness that fed to the bottom line.” There is no question he was among the visionaries in the development of shale gas plays in Canada and the United States. At the same time, there is a question of why he didn’t react more quickly to the fact other companies were essentially copying Encana’s natural gas strategy. The application of horizontal drilling techniques to the shale plays worked better than anyone thought possible. When Encana had more natural gas than its competitors, life was good. But as other companies caught up, with the result that today’s natural gas prices in the middle of winter are in the low end of the $3 range per thousand cubic feet, Encana’s competitive advantage waned and the company began to look at ways at increasing its liquids production. It appeared Eresman was second-guessing his own pure play natural gas strategy. … With Encana’s lucrative hedges long expired, the company increasingly needs to look at the joint venture model as a way to access capital for development. The risk with joint ventures is that while they might give a company the cash it needs to accelerate development of certain assets, it also means being beholden to the agenda of the joint venture partner; the two interests are not always aligned.
For now, however, one thing is clear. Retirement announcements don’t generally happen on a Friday afternoon at 4 p.m., without a succession plan in place and include the CEO stepping down from the board effective immediately. This state of affairs doesn’t fall under the best practice definition of board governance and in light of this, investors might want to ask Encana’s board a few questions of their own.
Encana CEO Randy Eresman retires suddenly, News release confirms top executive stepping down after 35 years by Dan Healing, January 11, 2013, Calgary Herald
In a surprise move Friday after stock markets closed, Encana Corp. announced that president and chief executive Randy Eresman, 54, is retiring effective immediately. Canada’s largest natural gas producer said in a news release that Eresman had tendered his resignation earlier in the day and would also leave the board of directors, although he has agreed to stay on as an adviser until Feb. 28. “I have had a wonderful and fulfilling 35-year career with Encana and its predecessor, Alberta Energy Company Ltd., which began as a summer student in 1978,” said Eresman in a company news release. “While I have always had a wide variety of interests, I will now be able to pursue them more extensively.” Poor gas prices over the past two years have resulted in criticism for Encana, which on Eresman’s watch hived off its heavy oil and oilsands assets to create Cenovus Energy Inc. three years ago. Encana has since fallen from over $36 per share to $19.50 while Cenovus has risen from almost $28 to $33.53.
Two financial analysts who asked not to be identified said it seems likely Eresman was asked to retire. They said shareholders have criticized Encana’s “aggressive spending” as gas prices fell and also feel the company is giving up too much with its “constant joint ventures” in a low price environment. “Mistakes were made,” said one, recalling the failed $5.4-billion PetroChina joint venture deal on Encana’s Cutbank Ridge, B.C., Montney unconventional gas assets in June 2011, which was announced before it had been finalized. The company, which has a market capitalization of $14 billion at Friday’s closing price, has been dealing with low cash flow by selling assets and attempting to close millions of dollars in joint ventures on its vast North American resource plays.
Encana director Clayton Woitas, president and chief executive of Range Royalty Management Ltd., has been appointed interim president and CEO, the company stated, while the board looks for a new leader. “Randy has played a key role in the development of Encana and, in his more than three decades with the company, he has made many important contributions to the company’s success,” said Encana chairman David O’Brien in the release. Eresman, trained as a petroleum engineer, was named Encana’s chief operating officer in 2002 and became president and CEO in early 2006. He placed ninth in the Calgary Herald’s top 10 best paid executives list last year with total 2011 compensation of $9.15 million. According to the company website, he was raised in the Medicine Hat area and he and his wife Shelly have two children.
Encana recently sold part of its stake in the Kitimat LNG project and associated gas-producing assets in northeastern B.C. to California-based Chevron Corp. In December, it announced a joint venture with PetroChina Co. under which the state-owned company will get a 49.9 per cent stake in Encana’s Alberta Duvernay shale acreage for $1.18 billion and $1 billion in development costs over four years. The deal brought Encana’s net proceeds from joint ventures and asset sales to $3 billion last year, higher than the targeted $2 billion to $2.5 billion. Last February, it sold a 40 per cent stake in its B.C. Cutbank Ridge play to Japan’s Mitsubishi Corp. for $1.45 billion.
Encana was accused last year of colluding with Chesapeake Energy to unfairly lower land prices in Michigan in 2010, although it launched an internal investigation that cleared key execetives of wrongdoing. Encana employees recently began moving into The Bow, Calgary’s tallest tower, after five years of construction.
Randy Eresman stepping down as Encana president, CEO by Nathan Vanderklippe with files from Kelly Cryderman, January 11, 2013, The Globe and Mail
Observers immediately doubted that this was a standard retirement, however, pointing out that companies typically give lengthy forewarning that a top executive is leaving. Mr. Eresman’s departure was announced suddenly in a Friday afternoon news release that some traders call an “f-bomb.” “It’s always nice to be able to say you retired. Effective today. And also from the board,” said a sardonic Jennifer Stevenson, a portfolio manager with GCIC Ltd. who runs the Dynamic Energy Income Fund. She added: “I think the effectiveness of his leadership is evidenced by the performance of the shares.” …
Encana has built up debt, sold off numerous parcels of its land through joint ventures with foreign companies and worked to reinvent itself by pursuing oil and other hydrocarbon liquids that attract a greater value. But it has not won market favour. Its shares, following a spinoff of oil assets into Cenovus Energy Inc. that Mr. Eresman engineered, traded in the mid-$30s. On Friday, they closed at $19.50.
Mr. Eresman also led Encana during a time when it was accused of colluding with Chesapeake Energy Corp. to keep prices low at land auctions in Michigan. Those allegations triggered an investigation by U.S. federal and Michigan authorities, although Encana said it was cleared of wrongdoing by an internal investigation. Mr. Eresman was also atop Encana when it failed in a 2011 bid to complete a $5.4-billion joint venture with PetroChina, although a series of subsequent deals injected substantial money into the company. His leadership, which saw the company promise to double production in five years, then abandon that goal amid sinking gas prices, triggered longstanding grumbling in the investment community. In late 2011, Laura Lau, a Toronto energy fund manager, accused Mr. Eresman of changing “his strategy four or five times in the last year. … He’s getting pretty close to capitulating on most of his plans.” At the time, Mr. Eresman shot back: “We’re not really changing our strategy. We are altering it to the reality of the market.” Oil patch rumours, however, suggested that, according to one investment banker, “the board was having a lot of oversight on the management of Encana, which to me meant they were concerned.” [Emphasis added]