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Encana steps up natural gas retreat
GARY PARK For Petroleum News
Continuing its remake from a natural gas to a liquids company and desperate for ways to reduce its net debt, Calgary-based Encana has completed North America’s largest energy land deal of 2015 by striking a deal to pull out of the Haynesville shale in northern Louisiana.
The sale, which involves 112,000 acres of leased land and five fee-mineral lands and production of 217 million cubic feet per day from 300 wells, will deliver cash of US$850 million to Encana and a US$480 million reduction in gathering and midstream commitments.
Estimated proved reserves at the end of 2014 were 720 billion cubic feet equivalent of gas, which accounted for 9 percent of the company-wide production, but less than 2.5 percent of Encana’s first half operating cash flow.
Encana Chief Executive Officer Doug Suttles said that “by further focusing our portfolio we are making Encana more efficient as we proceed through the second half of 2015 and into 2016.”
Reduction of long-term debt The total cash consideration will be used to reduce Encana’s long-term debt, which stood at US$6.11 billion on June 30, down from US7.34 billion at the end of 2014.
Since he unveiled a new course for Encana two years ago, Suttles has concentrated on refocusing the company to just four oil and gas formations - the Duvernay and Montney in Western Canada, and the Permian and Eagle Ford, primarily concentrated in Texas.
The shifting balance was captured in the company’s second quarter results, which showed liquids production of 127,300 barrels per day (up 87 percent from a year earlier), while gas was down 38 percent at 1.57 billion cubic feet per day.
But, as fast as it made headway in its strategic plan, Encana was sideswiped by dramatic changes in the demand for oil and the stock markets, which have seen its value drop below US$7 on the New York Stock Exchange from a 52-week high of US$23.40.
Lou Schizas, an equities analyst for the Canadian specialty channel Business New Network, said in the Globe and Mail that Encana’s three-year stock chart “has all the patterns that should alert investors to the risks associated with bottom fishing,” including an “inability to hold support at various levels and a series of lower highs and lower lows.”
He said the aggressive decline that started more than four months ago “offered no signs that the stock was about to reverse the downtrend ... (with) no signals pointing to a trend reversal in the near term.”
US$3,900 per mcf Commenting on the Haynesville asset sale to a joint venture by two Houston-area companies, GeoSouthern Haynesville and GSO Capital Partners, Greg Pardy, an analyst with RBC Dominion Securities, said the transaction “appears to be in the ballpark with our expectation.”
In a note to clients, he said Encana will receive US$3,900 per thousand cubic feet equivalent a day of production and US$1.18 per thousand cubic feet equivalent of reserves.
Kyle Preston, a National Bank Financial analyst, said the transaction is “marginally positive as it allows the company to pay down debt without having a material impact on operating cash flow.”
Sources which have tracked the anticipated sale of the properties said it took Encana from April to close a deal.
An Encana spokesman would not say whether the company plans to unload more of its gas portfolio in coming months, but he observed that Haynesville is a dry gas play that Encana was not investing in.
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