Encana to sell B.C. gas assets
Mitsubishi to acquire 40 per cent
CALGARY — Encana Corp., Canada’s largest natural gas producer, said it will sell a 40 per cent stake in gas assets in British Columbia to Mitsubishi Corp. in a deal worth $2.9 billion, and posted a drop in quarterly operating profit hurt by impairment charges.
The deal to sell a stake in Cutbank Ridge extends a string of Encana’s gas asset sales as it looks to strengthen its balance sheet to weather low prices and plow money into developing higher-value liquids rich gas.
“We see a tremendous amount of potential in this transaction,” said Encana chief executive Randy Eresman, on a conference call Friday, noting Encana will remain operator of the play through the deal, expected to close by the end of the month. “We expect that the production profile of the assets will align well with the expected start up of planned West Coast LNG (liquefied natural gas) export facilities.”
Research analysts said the deal provides much-needed cash to prop up Encana’s balance sheet. Encana gets a better price, at about $10 million per section of land, than the company would have received through a $5.4-billion joint venture with China’s Petrochina Co. Ltd. in the same Montney formation gas play, which fell apart last June before the deal was set to close.
“This is a really good deal,” said Kam Sandhar of Peters & Co. of the Mitsubishi joint venture. “It also allows them to continue to spend in the Montney with less capital exposure. Mitsubishi carries a portion of their capital costs over the next five years.”
Bob Brackett of Bernstein Research pointed out proceeds of the Mitsubishi joint venture are in addition to recent Encana midstream asset sales.
“That helps Encana get through this year’s funding issue,” Brackett said.
Natural gas prices have remained close to historic lows, driving oil and gas companies to move to liquids-rich regions and shut in production.
Encana which pared its 2012 capital investment budget 37 per cent, said it aims to reduce North American natural gas supplies by 600 million cubic feet a day to cope with depressed pricing, starting with the shut-in of 250 million cubic feet of production.
Eresman said Encana will be spending little on dry gas development in Canada this year, continuing the company’s recent focus on oil and liquids-rich opportunities.
“We have chosen to cut back spending on our dry gas resource plays,” Eresman said. “We believe that limiting funding in these dry gas plays is the most prudent course of action to preserve the value of these assets until the commodity price recovers.”
With the shut production, Encana joins such compa- nies as Chesapeake Energy Corp. and Conocophillips Co. in taking supplies of the market in efforts to chip away at a massive oversupply.
Mitsubishi will pay $1.45 billion on closing of the joint venture deal, upon which Encana expects to have more than $3 billion in cash and equivalents on its balance sheet.
Mitsubishi, which will jointly develop the project, will invest another $1.45 billion in the next five years, which will cut Encana’s capital funding commitments to 30 per cent of the total expected capital investment over that period.
“Mitsubishi looks forward to tapping new natural gas supplies for the long-term development and eventual delivery to world markets,” said Jun Yanai, Mitsubishi’s executive vice- president and chief executive of the company’s energy business group, in a statement.
The Japanese company is also working with Calgary producer Penn West Exploration on the Cordova Embayment shale gas play in northeastern B.C., a joint venture Mitsubishi has said will help it understand shale gas development and potentially export the gas in liquid form to as a secure, stable supply of energy to Asia.
Mitsubishi is partnered with Royal Dutch Shell PLC, Korea Gas Corp. and Petrochina parent company China National Petroleum Corp. on a potential LNG export project in Kitimat, B.C., a community where Encana and partners Apache Corp. and EOG Resources Inc. propose a separate LNG project.
“Ultimately, if Mitsubishi wants a large export LNG project, they’re going to need multiple tcf (trillion cubic feet) of gas. So maybe that’s what they’re looking at,” Brackett said.