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Encana’s Deep Panuke Possibly For Sale

Encana Corp. could sell the Deep Panuke natural gas project offshore Nova Scotia, CFO Sherri Brillon said Tuesday.

Speaking at the BMO Capital Markets Unconventional Resource Conference, Brillon acknowledged that the onshore operator's offshore platform "doesn't really fit our portfolio." She offered no indication of whether there’s a buyer in the wings.

Encana, the largest natural gas producer in Canada and one of the largest in the United States, last year began a big shift production-wise to onshore liquids from gas. CEO Doug Suttles, who took the helm in 2013, has overseen a huge restructuring, which has included staff cutbacks and asset sales. The slow startup of more liquids output and choking off funds for gas prospects sent the stock tumbling last month (see Daily GPI, Dec. 11, 2013).

Deep Panuke was once considered an indispensable asset because it was to supply much-needed North American gas supplies. That is, of course, no longer the case. Ramp up began last summer and achieved the maximum production rate from four wells of 300 MMcf/d in December (see Daily GPI, Dec. 18, 2013).

New England is the destination for the gas today. Gas infrastructure in the region is expected to be under pressure from demand growth in the power sector in the coming years, according to an analyst for the New England States Committee on Electricity (see Daily GPI, Sept. 30, 2013).

The region's need for gas could prove fortunate should the exploration and production (E&P) company put Panuke on the market and move the sales proceeds to onshore targets, said Patrick Rau, NGI's director of Strategy & Research.

"Encana might very well be looking to sell its Deep Panuke project in order to focus on higher margin oil and natural gas liquids [NGL] production," Rau said. "Deep Panuke is dry natural gas, so the company does not receive the extra economic kicker of extracting natural gas liquids and selling those in addition to the natural gas. Producing NGLs can make a huge difference in the economics E&P companies receive versus just producing dry natural gas, a point that many publicly traded E&P companies eagerly highlight in their Investor Relations presentations.

Encana's management team is on the record, Rau noted, that the bulk of its capital this year is destined for only five key areas of North America, "all of which are either crude oil plays or formations with rich, NGL producing natural gas. Those areas are the Montney and Duvernay shales in Canada, and the Denver-Julesburg Basin, the San Juan Basin, and the emerging Tuscaloosa Marine Shale in the U.S."

Encana hasn't indicated that it would need to sell any assets to fund the capital program through 2017, but monetizing Panuke would allow the company to dedicate even more capital to its liquids-rich targets, if it chose, Rau said. The recent run-up in natural gas prices also wouldn't hurt if Encana were to sell the asset, and the higher prices may be fueling the decision.

"You can't blame the company for trying to capitalize on the recent rise in natural gas prices, which most likely have been fueled by the more short-term factor of colder than normal temperatures in North America than a longer-term improvement in the supply/demand outlook for natural gas," said Rau.

"Any company that buys the Deep Panuke assets might do so obviously because it thinks those assets are undervalued based on the current forward curve for natural gas prices. But it also might do it as an option that either Canada will start exporting liquefied natural gas at Goldsboro and/or Canaport, or that gas fired electric demand in the Northeast U.S. will grow significantly. However, at this point, it's far from guaranteed that either will ever happen."

Encana already has committed to selling the Panuke production to Spain's Repsol. Rau said he wondered how that agreement may impact a possible sale to a third party.

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