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King of the Hills EnCana pounces on Tom Brown, tightening grip on U.S. Rockies gas plays Gary Park Petroleum News Calgary Correspondent
Already the dominant force in the U.S. Rockies, EnCana is taking a bold step to shut any would-be rivals out of the region by offering $2.7 billion for Denver-based independent Tom Brown.
In announcing the bid April 15, the Canadian independent also said it plans to sell “non-core” conventional assets producing 40,000-60,000 barrels of oil equivalent per day in Western Canada for $1 billion-$1.5 billion this year on top of divestitures to date of $380 million.
Chief Executive Officer Gwyn Morgan said the net effect of the deal-making will balance out EnCana’s production, but “significantly enhance” the company’s portfolio by lowering its Canadian decline rate and moving in assets that are “growing rather than falling.”
The Tom Brown takeover is scheduled to close on June 1, provided 90 percent of shareholders go along with the recommendation of their board of directors and tender to the cash offer of $48 per share, a premium of 24 percent to the April 14 closing price.
Tom Brown’s assets are concentrated in the Rockies, Permian Basin, East Texas and Western Canada and total 1.2 trillion cubic feet equivalent of reserves, producing 325 million cubic feet per day.
EnCana exited 2003 with reserves of 8.4 tcf of gas and 957 million barrels of oil and liquids, which generated average daily sales volumes for the year of 2.57 billion cubic feet of gas and 222,500 barrels of oil and gas liquids. Rockies output would rise to 1 bcf per day Incorporating the Tom Brown assets, would see EnCana’s Rockies output alone increase to 1 billion cubic feet per day from 588 million cubic feet for all of 2003 and 654 million cubic feet over the final quarter.
The two-step plan of buying Tom Brown and selling Western Canadian properties, which is expected to involve two packages in the second half of 2004, would see U.S. gas production increase to 24 percent of EnCana’s total output from 18 percent and boost U.S. and Canadian production to 88 percent of the company’s total, said Randy Eresman, chief operating officer.
Morgan said in a statement that acquiring Tom Brown’s “long-life natural gas reserves and production, together with the high-growth potential of its undeveloped resources located in the key unconventional onshore U.S. gas basins, will further advance our North American resource play strategy.”
That strategy has seen EnCana (through co-founder Alberta Energy Co.) embark on a takeover spree in recent years, notably its 2001 acquisition of Ballard Petroleum to gain entry into Mamm Creek.
Roger Biemans, president of EnCana Oil & Gas (USA), said EnCana has multiplied the Ballard reserves by seven-fold to 1 tcf and the production by ten-fold to 210 million cubic feet per day, contributing to a compound growth rate in the United States of 75 percent, three-quarters of which has come through the drill bit.
In addition to the reserves, Tom Brown contributes 2 million net acres of undeveloped land.
EnCana said that since 1998 Tom Brown has grown its production by 18 percent annually from the Piceance, Green River, Wind River, Paradox, East Texas, Permian and Western Canada basins and has identified about 3,200 drilling locations. Gas future in unconventional assets Morgan told a conference call that the kind of “resource” plays in the Tom Brown portfolio are at the heart of EnCana’s strategy, because of the company’s unwavering belief that the future of North American gas lies in “unconventional assets ... what we call resource plays.”
He said EnCana is confident it can achieve its target of 10 percent annual growth in share value by applying its “core competencies” to exploiting deep, multi-zone gas plays.
Morgan has previously indicated he is counting on gas prices to remain strong in North America until at least 2008 because supplies are flat, demand is building and imports of liquefied natural gas will not reach North America in significant volumes until late this decade.
Some analysts, such as Thomas Driscoll and Philip Skolnick from Lehman Brothers, have questioned whether EnCana is “spending too aggressively,” noting that in 2003 it spent $4.2 billion on its upstream core capital program, or about $570 million more than budgeted, while adding $525 million to debt in the final quarter.
To give itself some protection, Morgan said Tom Brown’s price hedges of half its expected gas production in 2004 and a lesser portion for the first quarter of 2005 will be expanded to 100 percent of forecast production through 2006.
But he was emphatic that the acquisitions and divestitures planned for 2004 will enable EnCana to remain “well within” its debt to capitalization ratio of 35 percent-45 percent. The company has also scheduled early meetings with rating agencies to make what Morgan described as the company’s case that it has a “lot of resiliency around ratings.”
Morgan was not willing to say who initiated the Tom Brown negotiations beyond saying that EnCana’s subsidiary and Tom Brown are both based in Denver, “where we see each other once in a while and find ourselves competing with each other once in a while.”
He said that because the two companies are in the middle of a tender offer he was precluded from any detailed discussion of future development plans, but did agree that bringing Tom Brown’s Rockies assets into the fold will “strengthen our resolve” to get a 1.3 billion cubic feet per day pipeline from northwest Colorado to the Cheyenne hub on stream in 2005.
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