04/15/2014 07:38 EDT | Updated 06/15/2014 05:59 EDT

Encana advances plans for publicly traded spinoff PrairieSky Royalty

CALGARY - Encana Corp. (TSX:ECA) has advanced its plans for spinning off a portion of its assets in Western Canada into a separate publicly traded business, to be called PrairieSky Royalty Ltd.

PrairieSky doesn't intend to directly develop or produce petroleum or natural gas. Instead, the new company will focus on attracting third party capital investments to develop the properties.

The filing says PairieSky intends to use a majority of its free cash flow to pay dividends to its shareholders on a monthly basis.

Calgary-based Encana expects to continue owning a majority interest in PrairieSky after the IPO, but details of Encana's stake aren't disclosed in documents prepared for the new company's initial public offering.

A management analysis provided in the document estimates that PrairieSky would have produced $195.2 million of free cash flow last year if it had been an independent company and would have paied a total of $165 million of cash dividends in 2013.

Free cash flow is a financial measure that analysts and investors frequently use to measure the performance of oil and gas companies, although there's no definition of the term under international financial reporting standards.

Encana originally announced plans for a spinoff in November, when it slashed its dividend and said it would reduce its workforce by 20 per cent as it simplifies its sprawling operations.

Net proceeds from the proposed sale of PrairieSky shares will go to Encana.

The PrairieSky preliminary prospectus was filed with regulators after markets closed Monday. Earlier in the day, Encana shares hit a 52-week high of $24.99.

PrairieSky, currently a subsidiary of Encana, was formed Nov. 27 to acquire a royalty business that receives cash payments based on production from lands in central and southern Alberta.

Encana will receive the net proceeds from the public offering and sell some of its assets to PrairieSky in return for shares of the new company about two days before the offering closes.