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Cash-rich EnCana is betting its balance sheet on bitumen

The takeover noise around EnCana was too loud, for too long, for there not to be something happening at Canada's biggest energy company. Now we know what might have been causing all the chatter.

EnCana revealed yesterday that it is contemplating an expansion of its oil sands projects that could increase production 12-fold, and cost up to $7.5-billion. If recent experience has taught us anything on spending estimates coming out of the Fort McMurray area, it's that even the biggest projections end up being too small. EnCana is talking about betting its balance sheet on bitumen.

As he announced these expansion plans, EnCana chief operating officer Randy Eresman seemed to confirm what Calgary has been buzzing about for months. He explained that EnCana has received "unsolicited inquiries" from all sorts of players interested in participating in the oil sands project. The inquiries come from unnamed "multinational" oil companies and EnCana is now "pursuing various business opportunities" with potential partners.

The rumours were only partly correct. It looks like Royal Dutch Shell didn't want to buy EnCana, it just wanted a piece of the oil sands.

It will be interesting to see just who EnCana hooks up with to develop one of the largest oil sands properties. There's speculation that cash-rich mining company Teck Cominco is interested in striking a deal similar to the $475-million stake it took in the Fort Hills property that's being developed by Petro-Canada. Teck is just one of a long list of potential suitors to be interviewed, as the capital-intensive game of developing the oil sands continues to play out.

There's an enormous opportunity here for financiers. In fact, two years ago, one of the more experienced Calgary energy analysts mused over his second beer that it was high time he walked away from his employer -- a bank-owned house -- and start up a dedicated boutique investment dealer focused entirely on the oil sands. I promptly ordered another round of lager to drown the silly thought before it took root, 'cause to my narrow mind, the economics of the oil sands didn't make sense. That third beer probably cost the poor sod millions, because there's now a clear case for expertise in this field.

Golden Gate sticks its neck out

It used to be easy to spot potential targets for the private equity funds. The ideal candidate was a company that was sickly and/or unloved -- think of Sky Chefs, Celestica, Shoppers Drug Mart or Yellow Pages.

But in a world that's now awash in private equity money, funds are increasingly targeting fully valued, healthy public companies. Think of Masonite, bought last year by KKR or Geac, bought for $1-billion yesterday by tech-focused private equity fund Golden Gate Capital.

The firm plans to combine software company Geac with other tech holdings in its stable. It may turn out to be a huge money spinner. But the risks-reward ratio here is far less attractive than it is for a private equity fund buying an out-of-fashion turnaround candidate.

This deal saw J.P. Morgan Chase & Co. advise for Golden Gate, with Canadian legal help from Borden Ladner Gervais. Bear Stearns Cos. was Geac's financial adviser, along with law firm Skadden, Arps, Slate, Meagher & Flom.

Insurer gets mutual feeling

I have never understood why the banks, rather than the insurers, came to dominate Canadian mutual funds.

A generation back, when both groups had no real mutual fund operations, the insurers seemed to be holding all the cards. They had distribution, in the form of insurance agents, for a product that is sold, not bought. They had manufacturing, with deep in-house money management expertise.

Despite these advantages, four of the 10 largest Canadian fund families are now bank subsidiaries. The insurers are playing catch-up.

Industrial Alliance Insurance stepped up yesterday by outbidding CI Fund Management with a $189-million offer for Clarington Corp. Over time, watch for Industrial Alliance to shift Clarington's $2.4-billion of assets to in-house managers, as the newly acquired company traditionally farmed out money management.

Scotia Capital advised Industrial Alliance on this takeover, while Clarington got advice from Blair Franklin Capital Partners.

Blair Franklin is primarily an advisory firm, although it has a hedge fund arm that was founded over a year ago by a team that includes former Scotia Capital and Altamira CEO Gordon Cheesbrough, and ex-Davies Ward Phillips & Vineberg lawyer Steven Sharp.

© 2007 The Globe and Mail. All rights reserved.

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