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What: Shares of Encana Corporation (NYSE:ECA) were down by double digits in March. The sell-off was fueled by the continued weakness in oil prices, as well as the fact that Encana raised some equity at a below-market price. It needed the extra cash to pay down some debt as commodity prices remain weak.
So what: Encana Corporation saw a chance to raise equity in early March as the capital markets finally reopened to energy companies as oil prices started to stabilize. The company initially wanted to raise C$1.25 billion from the market by selling stock at C$14.60 per share, which was well below its then trading price (for shares traded on the Toronto Stock Exchange via the ECA.TO ticker), as we see on the following chart.
Investors gobbled up these discounted shares, as well as the full overallotment, as the company was able to raise C$1.44 billion. It plans to use the capital to pay down two tranches of its long-term debt consisting of US$700 million in debt that matures in 2017, and C$750 million in debt that matures in 2018. Given how unkindly the market has viewed energy debt, Encana decided it was better off to get these bonds off its balance sheet as it wanted to improve its flexibility.
Now what: Encana took advantage of a window of opportunity in the market to raise capital to improve its financial flexibility by cutting its long-term debt and its interest expenses. This was a prudent move, as no knows how long the downturn will last, or if market conditions will deteriorate any further. This move cost the company's existing shareholders, who saw their investments drop double digits as Encana chose to dilute them rather than running the risk of having its debt be a weight that couldn't be overcome if the market started to worsen again.
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