-Cost of Capital
Table of Contents
b.Major Product and Services5
3.Calculating Cost of Capital6
a.Calculating Cost of Equity7
i.Risk free rate7
ii.Market Risk Premium8
b.Calculating Cost of Debt9
c.Weighted Average Cost of Capital ( WACC )10
d.WACC- EnCana Corp. 201012
4.Discussion Questions & Summary12
c.Depreciation & Deferred Taxes14
The case involves calculating the cost of capital for EnCana Corporation. The analysts in the case discussed about the use of several models and the components of the models to determine the cost of capital from various sources that EnCana uses. Financial statements for 2005 (Balance sheet and Income Statement as of December 31, 2005) were provided. In addition to this data, EnCana’s schedule of debt, selected data (closing stock price, EPS, Dividends per share, P/E ratio, Dividend yield and Total return) on EnCana’s common stock from 2002 to 2005 and yields on long-term government bonds from 1980 to 2005 was also provided.
EnCana Corporation is one of North America's largest natural gas producers, with about 95 percent of its production being natural gas. Its strategy is to be a natural gas pure-play company focused on the development of unconventional resources. The company produced 1.1 trillion cubic feet of natural gas in 2009. The company’s oil sands growth profile was one of the most aggressive in North America, with an additional 500 MBD (millions of barrels per day) of oil sands bitumen production expected by 2015. EnCana was formed in 2002 with the merger of Pan Canadian Energy and Alberta Energy Company. The corporate headquarters are in Calgary, Alberta. In Canada, EnCana has operations in Alberta, northeast British Columbia as well as an off-shore operation called Deep Panuke in development off Nova Scotia. In the United States, EnCana operates in Colorado, Wyoming, Texas and Louisiana. EnCana expanded its operations in the US Rocky Mountain region with the purchase of natural gas assets and land in Northwest Colorado, in 2002. In mid 2002, it completed a major land acquisition along the Devonian Jean Marie reef margin in the Greater Sierra region in Northeast British Columbia. In the same year, it purchased assets in the Jonah field, in Southwest Wyoming. EnCana also sold its stake in EnCana Suffield Gas Pipeline, in the same year. EnCana completed its vertical amalgamation with its wholly owned subsidiary AEC, in 2003. In the same year, it sold its 70% indirect interest in Cold Lake Pipeline System to Inter Pipeline Fund; interest in Express Pipeline System to a consortium comprised of BC Gas, Borealis Infrastructure Management, and Ontario Teachers’ Pension Plan; and its 10% interest in the Syncrude project to Canadian Oil Sands. Further in 2003, the company acquired reserves and production facilities in Ecuador from Vintage Petroleum. In the same year, it acquired prospective natural gas development lands in the Cutbank Ridge area of the Canadian Rocky Mountain foothills. Subsequently, EnCana Oil & Gas USA, a subsidiary of EnCana, acquired natural gas and associated natural gas liquids (NGLs) production, reserves, and acreage from Mesa Hydrocarbons. It also acquired Savannah Energy, in the same year. EnCana disposed it assets in New Mexico and sold its interest in Petrovera Resources, in 2004. In the same year, it acquired Tom Brown, located in New Mexico. The company also disposed its stake in the Kingston CoGen and Alberta Ethane Gathering System joint venture and sold its UK Central North Sea upstream assets to Nexen, in the same year. EnCana sold its Gulf of Mexico assets to Statoil, and also announced the sale of its...