Calgary-based Cenovus Energy Inc. is selling its natural gas-weighted Palliser properties in southeastern Alberta for $1.3 billion to a joint venture between privately held Canadian producer Torxen Energy and Schlumberger Ltd.

The Palliser block consists of oil and gas wells, surface facilities, a pipeline network and about 800,000 acres of development rights. Current production is 54,000 boe/d, 77% weighed to natural gas. The operating margin is estimated at $106 million, with a price of $24,000/boe/d.

The Palliser block borders acreage awarded to Schlumberger Production Management (SPM) and the Torxen partnership established earlier this year.

Under the agreement, Houston-based Schlumberger would be the majority nonoperating owner, with the rights to exclusive oilfield services while Torxen would operate the assets. The development strategy includes a multi-year drilling program of more than 1,600 oil wells starting in 2018.

“By leveraging our reservoir knowledge, oilfield services technology and project management expertise, we expect to lower development costs and maximize the value of this asset -- in a market where our traditional business model is challenged to deliver the required financial returns,” said Schlumberger’s Patrick Schorn, executive vice president of New Ventures.

Evercore ISI’s James West said the Palliser block “vastly enhances and diversifies the scale and productive base of Schlumberger’s SPM business, which we estimate previously totaled 250,000 boe/d, largely comprised of oil production.”

SPM also has investments overseas, as well as with SM Energy Co. in the Powder River Basin, West noted.

“Interestingly, most of the incremental opportunities are in North America (NAM), and we believe the receptiveness of the NAM market speaks to the willingness of customers to adopt more efficient business models that better align with the interests of the operator and service contractor,” he said.

SPM represented only 5% of Schlumberger’s 2016 sales, but it provides a “stable, baseline of revenue and cash flow that is more closely tied to production than customer spending trends,” helping to insulate the oilfield services leader from the inherent cyclicality of the business.

The sale, set to close by the end of the year, would help Cenovus deleverage the balance sheet. The operator has been working to rebuild its balance sheet by selling off other assets, including the recent sale of its Pelican Lake and Suffield properties.

“Our strategy to optimize our portfolio by selling non-core assets and using the proceeds to pay down debt is firmly on track,” said Cenovus CEO Brian Ferguson. “We continue to target between $4 billion and $5 billion in announced asset sale agreements by the end of the year, and we remain committed to returning to our long-term debt ratio target.”

Still on the market is the Weyburn carbon dioxide enhanced oil recovery operation in Saskatchewan, which management said “is proceeding as expected.” Cenovus expects to have a Weyburn sale agreement in hand before the end of the year. Other noncore assets also are being evaluated for potential sale.