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Life after PetroChina Encana turns to Plan B in wake of failed JV, seeks buyers for smaller pieces of company, shifts attention to oil, natural gas liquids Gary Park For Petroleum News
Encana is plunging into an uncertain North American M&A market as it tries to rework its balance sheet and regain investor faith after the demise of its planned $5.4 billion joint venture with PetroChina.
The North American unconventional gas powerhouse has sold part of its Piceance midstream assets in Colorado to an unnamed private company for $590 million, is looking to sell its original shale gas assets in the Texas Barnett Shale for what analysts think could be $800 million to $1 billion and has a sales process under way for a portion of its Jean Marie property in British Columbia — all part of its plan to raise $1 billion to $2 billion from the sale of non-core assets before the end of 2011.
It is also looking for partners to replace PetroChina and accelerate development of its Horn River basin and Cutbank Ridge areas of British Columbia.
But analysts at a New York investor conference on Sept. 8 seemed to doubt Encana’s wisdom of continuing to pay a dividend, currently 20 cents per share per quarter, while restraining production growth, selling assets to reduce debt and struggling to maintain balance sheet strength.
Encana Chief Executive Officer Randy Eresman replied that the dividend is based on Encana’s long-term expectations of pre-cash flow generation and its effort to monetize assets that will not generate value in the company’s overall portfolio.
He expects to have received bids for joint ventures in October and be able to make announcements either late this year or early in 2012.
Plan B Bob Brackett, a research analyst with New York-based investment advisor Sanford C. Bernstein & Co., said the loss of the PetroChina JV in June has forced Encana to step up the pace of transactions.
He said the Colorado sale “fits the bill” and is evidence that Encana had a Plan B in mind in case Plan A with PetroChina failed.
Andrew Potter, an analyst with CIBC World Markets, said in a research note he expects “many other transactions” will likely be announced before the year ends.
The post-PetroChina strategy has seen Encana shift its spotlight to high-priced oil and gas liquids plays and away from the soft gas market, while scouting for JVs on undeveloped portions of its Montney shale property, Cutbank Ridge and associated midstream and processing assets.
Potter said that even a smaller-scale JV at Montney should produce a deal of $2 billion to $3 billion.
Eresman said the asset sales will strengthen Encana’s balance sheet, “providing greater financial strength and flexibility going into 2012.”
He said that over the past two years Encana’s investments have “outpaced cash flow generation, largely as a result of our deliberate initiatives to maintain our strong dividend and to assemble large, diversified, low-cost resource positions in many promising oil and liquids-rich plays and to expand the market for North American gas.”
Eresman said the results has been additions to an already-extensive land base in the Collingwood shale in Michigan, Alberta’s Duvernay shale and the Tuscaloosa marine shale in Mississippi and Louisiana.
Gas prices a factor In addition, he said preliminary plans include reduced capital spending on drier gas plays in 2012 and, if gas prices remain “stubbornly low,” steering investment to oil and liquids exploration and development opportunities.
He told a New York investor conference that in a period of “cyclically low natural gas prices” that Encana has allowed its leverage over the short term to increase, but that debt is approaching the “upper limit” of where it should be.
“While these strategic investments have temporarily impacted our balance sheet, the divestiture and joint venture initiatives we have undertaken should have us well inside our managed financial ranges and provide additional financial flexibility going into 2012,” he said.
Eresman said his company can be profitable even when gas prices are below $4 per thousand cubic feet.
Others selling Barnett Encana is not alone in exiting the Barnett play, which is entered in 2004 and is currently producing at an average 125 million cubic feet equivalent per day. Up for sale are associated processing and pipeline facilities on about 52,000 net acres.
To date this year, Range Resources sold its entire Barnett holdings for $900 million to Legend Natural Gas IV and Carrizo Oil & Gas sold 25 percent of its Barnett acreage to KKR Natural Resources for $104 million.
Some analysts have suggested that Encana needs a successful transaction to persuade the market that it can continue to spend at its current pace entering 2012, even with gas prices in a slump.
Morningstar analyst Rob Bellinski said Encana is “looking at a tough sell right new,” citing the company’s investor presentation last year when it put a breakeven price of $4.37 per million British thermal units on its Barnett interests.
Jim Jarrell, managing director of ITG Investment Research, said prospective buyers would have to be confident out the outlook for gas prices and their operating acumen to regard the Barnett assets as attractive.
He said gas would have to trade at about $5 per thousand cubic feet on the New York Mercantile Exchange just to break even.
An upbeat gas view However, not everyone takes a gloomy view of the gas business.
Mike Rose, chief executive officer of Tourmaline Oil, which acquired Cinch Energy three months ago for C$227 million, said “gas is the place to be.”
“On the demand side, I think gas is the logical choice in the long term because it would probably satisfy a number of different objectives as far as being the cleanest of the fossil fuels,” he said. “And it’s certainly very abundant, given the shale gas revolution.”
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