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EnCana's Gulf of Mexico Sale Puts Core Focus on Unconventional Production

To improve its focus on unconventional onshore North American properties, Calgary-based EnCana Corp. said Thursday it plans to sell all of its Gulf of Mexico (GOM) interests to Norway's Statoil ASA for $2 billion in cash. Statoil, in turn, plans to make the U.S. offshore a core production area.

The assets have the potential to deliver 30,000 boe/d (net) by 2008-09, increasing to more than 100,000 boe/d (net) after 2012, according to Statoil.

"This divestiture is a continuation of EnCana's sharpened focus on our huge unconventional onshore North America natural gas and oil resources," said EnCana CEO Gwyn Morgan. "The growth potential of our resource play portfolio is evident from its total resource life of more than 25 years at year-end 2004."

The deal will net EnCana about $1.5 billion after tax and other adjustments, and is expected to close by June 1. EnCana's total investment to date in the GOM properties is $540 million. The gross proceeds from the sale will be credited to EnCana USA's full cost pool, which is expected to result in a reduction in the U.S. depreciation, depletion and amortization rate by approximately 15%.

The GOM interests contain six significant deepwater discoveries, including a 25% working interest in the ChevronTexaco-operated Tahiti discovery, one of the largest discoveries in the deepwater to date. Tahiti is scheduled to begin production in 2008.

The other five significant nonoperated discoveries -- Tonga, Jack, St. Malo, Sturgis and Sawtooth -- are currently under appraisal. EnCana holds a 25% interest in Tonga, Sturgis, Jack and Sawtooth; it owns a 6.25% interest in St. Malo.

Overall, EnCana's assets include an average 40% working interest in 239 gross blocks, covering about 1.4 million acres. On Dec. 31, 2004, EnCana had 41 MMboe proved reserves booked for the Tahiti discovery. Because the GOM properties are in the development and appraisal phase, there is no current production.

Peter Mellbye, Statoil's head of international exploration and production, said the acquisition "creates a new international core area for Statoil. It gives us the opportunity to utilize and further build on our capabilities in exploration, reservoir management and subsea technology."

Statoil was founded by the government of Norway in 1972 to oversee the country's petroleum interests. The country is the third largest oil exporter, after Saudi Arabia and Russia, with a capacity of 3.2 MMboe/d. The company employs 24,000 people in 29 countries.

Proceeds from the sale are expected to be directed to debt reduction and the continuation of EnCana's share purchase program. Under the current share program, the company may purchase up to 10% of the company's public float, or 46 million shares, at the time of the approval of the original bid in October 2004. The company had 440.8 million shares outstanding at March 31, and it may purchase about 20 million additional shares through the expiry of the Bid in October 2005.

EnCana is being advised on the sale by Morgan Stanley and Randall & Dewey. The independent, considered one of the largest producers in North America, also is continuing with the previously announced divestiture of its Ecuador assets and select conventional producing properties in Western Canada. Both divestitures are expected to be completed this year.

Following the announcement, Lehman Brothers' Thomas Driscoll said that "like with last year's sale of its North Sea asset base, which included the large Buzzard discovery, we feel EnCana has once again demonstrated its ability to monetize noncore, nonproducing assets for which the market is willing to pay full value." The gross proceeds "are more than twice our expectation of up to $750 million. The $2 billion sale price is nearly four times book value of $540 million."

Goldman Sachs wrote that EnCana "is attractive at $65/share and worth $80/share on a traditional peak valuation and $115/share on a super spike adjusted peak value." EnCana, said the analyst, is "extremely well positioned to benefit from higher than expected commodity prices, production growth and industry consolidation."

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