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EnCana sheds properties in Western Canada StarPoint Energy Trust spends C$400 million for crude wells as EnCana concentrates on unconventional gas plays Allen Baker Petroleum News Contributing Writer
EnCana Corp. continued its rapid pace of shedding conventional oil and gas assets with a roughly C$400 million sale this month of producing properties in Western Canada.
The planned transfer of 6,400 barrels of daily oil equivalent production (after royalties) to StarPoint Energy Trust was announced May 9, just after EnCana jettisoned its Gulf of Mexico properties to Norway’s Statoil for about $2 billion on April 28.
“Together with the 2004 sale of our U.K. North Sea assets and our recent agreement for the $2 billion sale of our Gulf of Mexico interests, EnCana is continuing to sharpen its focus on long-life North America resource plays where we expect to achieve reliable, profitable growth in reserves and production from unconventional gas and oil reservoirs,” said Gwyn Morgan, EnCana’s president and CEO. 84,000 BOE sales so far Since the beginning of 2004, EnCana has sold off fields producing 84,000 barrels of oil equivalent daily, collecting about $6 billion. Meanwhile, the focus is clearly shifting to gas, with all but 36 of the 690 wells drilled at key North American resource plays in the first quarter aimed at gas. Of the 654 gas wells in those areas, two thirds of them were shallow gas or coalbed methane wells, EnCana reported.
EnCana figures the sale at C$404 million before adjustments, while StarPoint says it’s worth C$392 million after adjustments. The wells involved produce about 6,750 barrels of oil equivalent (86 percent crude and gas liquids) daily before royalties, or 6,400 barrels after the royalties are subtracted out. That’s a relatively low royalty rate in Canada, where many fields have 20 percent allocated to the royalty slice.
It’s a major deal for StarPoint, which announced April 13 that it was merging with another Canadian energy trust, APF Energy Trust. The combined trust operations were expected to pump about 26,750 barrels of oil equivalent daily before the EnCana deal, so the combined trust’s production will grow by about a quarter with the EnCana properties.
StarPoint and APF are already strong in central and southern Alberta, where the new fields are located. According to StarPoint, the purchase will provide 10 crude oil pools with oil averaging 28 degrees API viscosity, and more than 250 million barrels of oil in place, though recoverable reserves are far less.
The company says it will get 100 percent working interests and all the assets are operated. There are opportunities for infill and step-out development drilling, as well as waterflood potential.
StarPoint has identified more than 120 development drilling locations, and many recompletion opportunities. There are also 35,000 acres of undeveloped land in the transaction, which will be added to the 500,000 acres the combined trust is expected to hold. Not cheap oil But the deal is fairly pricey, even StarPoint admits, with 16.2 million barrels of proved reserves and 22.8 million barrels of proved plus probable reserves. If only the proved reserves panned out, that would mean a cost of C$24.20 per BOE. With the probable reserves added in, it would mean a cost of C$17.16 per BOE. Operating costs are about $7 per BOE.
To finance the purchase, StarPoint has an agreement to sell 16.4 million subscription receipts, which will turn into StarPoint units, at C$18 each, to raise C$295 million. It is also selling $60 million in convertible debentures paying 6.5 percent and convertible into StarPoint units in 2010 at C$19.75 per unit.
StarPoint units trade under the symbol SPN.UN (SPN-UN.TO) on the Toronto Exchange. The units were selling for $18.25 at the close on May 11, with a payout of 20 cents Canadian monthly that yielded 11.6 percent. StarPoint says it will boost that payout to 21 cents a month in July, but the ratio of payout to total cash flow will actually drop to 69 percent after the EnCana transaction, compared with 72 percent currently.
StarPoint Trust was created last December from the former StarPoint Energy Ltd. Conversion of traditional oil companies into trusts is a continuing trend in Canada. Penn West Ltd. is expected to convert later this year into the nation’s largest energy income trust, with production of just more than 100,000 barrels of oil equivalent daily.
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