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Encana Sells Haynesville Leasehold to GeoSouthern JV For $850M

Encana Corp. is selling its once-heralded Haynesville Shale natural gas portfolio, where it today has about 300 wells across 112,000 net acres, for $850 million to strengthen its ailing balance sheet.

Subsidiary Encana Oil & Gas (USA) Inc. is making the deal with GEP Haynesville LLC (GeoSouthern), a joint venture of GeoSouthern Haynesville LP and funds managed by GSO Capital Partners LP. GeoSouthern is a division of privately held GeoSouthern Energy Corp.

In northern Louisiana, Encana's estimated year-end 2014 proved reserves were 720 Bcfe, nearly 100% gas. Most of the acreage is in DeSoto and Red River parishes.

"This is another step in advancing our strategy," CEO Doug Suttles said. "By further focusing our portfolio, we are making Encana more efficient as we proceed through the second half of 2015 and into 2016."

The sale, expected to close by the end of the year, also would enable Encana to reduce around $480 million in gathering and midstream commitments on a discounted basis through 2020. As part of the deal, Encana agreed to transport and market GeoSouthern's production on a fee-for-service basis for the next five years.

The sale "delivers significant proceeds that we'll use to strengthen our balance sheet," Suttles said. "In addition, it eliminates our midstream commitments in the Haynesville and captures ongoing revenue upside through a gas marketing arrangement."

In the first six months of this year, the Haynesville holdings produced an average of 217 MMcf/d, about 9% of total company output and less than 2.5% of operating cash flow, excluding hedges.

This year close to 80% of the Calgary operator's capital is being directed to liquids-rich plays: the Permian Basin, Eagle Ford and British Columbia's Duvernay and Montney formations (see Shale DailyJuly 24).

To lower its exposure to natural gas, and to join its peers in the oil rush, Encana last year spent close to $10 billion to acquire acreage in the Permian and Eagle Ford (see Shale Daily, Sept. 29, 2014; May 7, 2014). The purchases, however, preceded the oil price debacle, which splattered red ink across the bottom line, forcing cutbacks and layoffs.

The Haynesville long has been part of Encana's long-term strategy and over the past two years, it had been cautiously developing some of the property and lifting rigs (see Shale DailyFeb. 19, 2013). Encana also had been counting on the portfolio to take advantage of future liquefied natural gas exports from the region (see Shale DailyNov. 8, 2011).

GeoSouthern Energy, headquartered in The Woodlands near Houston, in late 2013 sold its Eagle Ford leasehold to Devon Energy Corp. for $6 billion (see Shale DailyNov. 20, 2013). The privately held producer, formed in 1981 by George Bishop, focuses today along the Texas Gulf Coast.

"GeoSouthern is a company defined by its entrepreneurial spirit and results-oriented management team," said President Margaret Molleston. "Our new joint venture with GSO, coupled with our history of successfully drilling and developing horizontal shale assets, gives us great confidence in our ability to enhance the value of these leases."

GEP Haynesville "will be positioned with significant financial flexibility to take advantage of the current market environment," said GSO's Dwight Scott, senior managing director.

"GeoSouthern intends to remain opportunistic and continue its entrepreneurial approach to new energy assets," management said. "With no debt outstanding at closing, aside from an undrawn revolver, the company's strong balance sheet and liquidity position enable the funding of growth investments and anticipated capital expenditures."

GSO, the credit division of Blackstone, is to receive preferred equity interests and a 10% common equity stake in the joint venture entity.

The deal is a positive for Encana, said analysts with Tudor, Pickering, Holt & Co. (TPH) on Tuesday.

The "headline valuation of $850 million represents $4,000/Mcf flowing, but it looks extremely robust on underlying cash flow as the company indicated production only represents 2.5% of first half 2015 production..." The cash component is "slightly short" of TPH estimates, which values the Haynesville portfolio at $900 million to $1 billion, "but gathering and transportation costs are likely higher than we initially expected..."

TPH said it still thinks Encana's San Juan and Denver-Julesburg basin assets are on the table to sell, but the decline in oil prices "could delay transactions."

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