ENCANA REACHES $2.1B DEAL WITH PETROCHINA
Joint venture fits with new guidelines
Less than a week after Ottawa clarified rules on state-owned enterprise investments in Canadian energy companies, Encana Corp. announced a $2.18-billion joint venture with PetroChina.
Canada’s largest natural gas producer said Thursday it would sell a 49.9-per-cent stake in its early-stage Alberta Duvernay liquids-rich gas holdings to Phoenix Duvernay Gas, a subsidiary of Chineseowned PetroChina.
The company checked in with the federal government before finalizing the deal, confirmed Mike McAllister, acting president of Encana’s Canadian division, in an interview.
He said the joint venture fits in well with investing guidelines released last Friday when Ottawa approved the $15.1-billion takeover of Nexen Inc. by Chinese-owned CNOOC.
“Right in the guidelines they talk about welcoming joint ventures for non-controlling interests, very similar to the joint venture we closed today with PetroChina,” he said.
“Everybody in the industry was watching very closely how the potential new rules might affect anything that they were in the process of doing or considering doing in the future,” Encana president and chief executive Randy Eresman told Bloomberg.
McAllister said the deal was reached after a competitive marketing process that attracted other bidders but wouldn’t say how many bid or if they were also state-owned companies.
Encana shares shot up two per cent in Toronto after the midday announcement and retained the gain to close at $20.85, up 41 cents.
PetroChina is the company that backed out of a $5.4-billion proposed joint venture deal on Encana’s Cutbank Ridge, B.C., Montney unconventional gas assets in June 2011.
That deal foundered on negotiation of terms, McAllister said, and is unrelated to the Thursday announcement. Encana brought in Tokyo-based Mitsubishi Corp. in a $2.9-billion joint venture on the B.C. assets last February.
The Duvernay partnership covers about 178,000 hectares, in two blocks around Kaybob in northwestern Alberta and Rimbey just northwest of Red Deer in central Alberta.
About $1.18 billion was paid on closing, Encana said. The rest, about $1 billion, is payable over the next four years and will cover half of Encana’s share of $4 billion it will spend as operator to develop the resource.
“The Duvernay project will combine Phoenix’s integrated upstream and downstream capabilities and financial resources with Encana’s proven resource play hub expertise,” added Zhiming Li, Phoenix’s president and CEO, in the release.
He added: “Encana is our ideal long-term partner for the development of our future natural gas business.”
Encana estimates the lands contain about nine billion barrels of oil equivalent initially in place. Actual recovery will be a percentage of that and will be reflected in reserve estimates as the resource is proven up.
Encana reports it has drilled nine wells into the Duvernay, five of which are producing, and it has two rigs actively drilling additional wells.
The Duvernay was the key driver of Alberta’s record $3.5-billion take from Crown drilling rights auctions last year. It is a long-known shale play enjoying renewed interest due to the development of horizontal drilling and multi-stage hydraulic fracturing technology.
In an early afternoon note to investors, analyst Michael Dunn of FirstEnergy Capital said the deal was a “positive” for Encana.
“At almost $10,000 per acre, this is a great metric given that this play is still in its early stages,” he wrote. “The cash component of the deal alone equates to $1.60 per share, and on a 100 per cent basis values Encana’s Duvernay position (pre-JV) at almost $6 per share.”
Andrew Potter of CIBC World Markets agreed.
“Our initial valuation is that Encana has monetized its Duvernay lands at approximately $9,800 per acre ... Discussion in the market was that a deal would likely be done in the $5,000-$10,000 per acre range,” he wrote.
As natural gas prices have plunged throughout North America over the past two years due to a glut of shale gas in the U.S., Encana has increasingly set its sights on joint ventures to provide capital it needs to develop its extensive land holdings.
Encana is a partner in the Kitimat LNG project being led by American producer Apache Corp. and it has said exporting liquefied natural gas from the Canadian West Coast will increase demand for the heating fuel.
Several companies are pursuing LNG export plants to take advantage of natural gas prices in Asia that are four or five times North American prices.
McAllister said the best value in the Duvernay play, however, is its production of field condensate, a natural gas liquid that commands a premium to West Texas Intermediate oil because of its use to thin oilsands crude so it can flow in a pipeline.
Encana said the PetroChina joint venture will help it end the year with a cash balance of more than $3 billion, beating its $2.5-billion target.
It began marketing the Duvernay assets last year and has also been looking for a partner in its undeveloped oil and liquid-rich plays in the United States, including Tuscaloosa, Eaglebine, and Mississippian Lime plays.
In April, Encana sold a one-third interest in its Alberta heritage coal bed methane field to Japan’s Toyota Tsusho Corp. for $602 million.