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Encana sells Montney assets Pipeline, processing units to be acquired by new JV; Encana will focus its 2015 capex on Montney, Duvernay, Eagle Ford, Permian Gary Park For Petroleum News
Encana is unloading natural gas pipeline and processing assets in Western Canada’s Montney region for $412 million in a move that tightens its focus on resource plays in Canada and the United States.
The deal with Veresen, a Calgary-based pipeline and power company, and KKR, a leading U.S. private equity firm, sets the stage for those two firms to establish a 50-50 partnership called Veresen Midstream to spend up to $5 billion on future production in the liquids-rich Montney play that straddles the British Columbia-Alberta border.
The new entity, starting with a $500 million contribution from each partner, will also provide compression and transportation services to Encana and its partnership with Japan’s Mitsubishi on a 30-year fee-for-service basis.
The transaction partly answers the question hanging over Encana’s ability to develop $9 billion of assets acquired in the past year at a time of weak energy markets.
Renee Zemljak, Encana’s vice president of midstream operations, said the sale will unlock “value from our midstream infrastructure that we can redirect to strategic upstream opportunities while ensuring reliable, efficient midstream service to support our ongoing operations and development in the Montney.”
$2 billion fund KKR has set up a $2 billion fund to invest in unconventional North American energy plays, adding its name to a growing list of private equity firms that have joined the Canadian oil and gas sector.
Veresen Chief Executive Officer Don Althoff told a conference call that the partnership was formed with KKR in response to an Encana call for proposals during the summer.
“We really do think one of the keys to our strategy is to build a platform in some of the best regions and then begin to connect those assets and optimize them,” he said.
“There’s a remarkable amount of growth opportunity in (the Montney) and it will keep us quite busy for the foreseeable future.”
Encana has been developing the Cutbank Ridge in the Montney with Mitsubishi, including plans to spend up to $700 million in 2015.
It will continue to operate the Cutbank Ridge midstream holdings, including about 300 miles of pipeline and 675 million cubic feet per day of compression.
Veresen said it will pay $600 million to Encana and Mitsubishi for the Montney midstream assets and related construction projects, plus the actual costs accrued in 2015.
Construction next year Construction will begin next year, assuming approval by Encana and Mitsubishi, on the Sunrise and Tower shallow cut gas plants to will have respective capacities of 400 million and 200 million cubic feet per day when they come onstream in 2017. The Saturn compression station, designed to handle 200 million cubic feet per day, is already under construction.
Althoff estimated the three projects will cost $1.5 billion.
Separately, Encana has budgeted capital spending for 2015 of $2.7 billion-$2.9 billion, up from about $2.5 billion in 2014, with 80 percent earmarked for the Montney and Duvernay plays in Canada and the Eagle Ford and Permian plays in the U.S.
Projected cash flow includes up to $2.7 billion on an expected 70 percent increase in liquids production to 140,000-160,000 barrels per day (equivalent to 36 percent of total output), based on a West Texas Intermediate price of $70 a barrel and Nymex natural gas price of $4 per thousand cubic feet.
Duvernay spending is targeted at a peak $1.2 billion, with $800 million allocated to its 50.1 percent owned joint venture with Brion Duvernay Gas, to develop 445,000 net acres, $350 million going to 25 net wells in the Simonette area.
In the U.S., $950 million is expected to be spent on 200 wells in the Permian basin, using nine to 13 rigs, while $750 million is tagged for 85 wells in the Eagle Ford to drill as many as 85 wells using three to five rigs.
Colorado’s DJ basin, the southwest’s San Juan basin and the southeast’s Tuscaloosa marine shale will account for spending of $450 million.
Encana Chief Executive Officer Doug Suttles said the goals for 2015 include growing liquids production along with “capturing new efficiencies throughout the business and protecting our balance sheet.”
He said Encana’s portfolio is “resilient” in the midst of the current commodity price cycle.
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