EnCana Corp. last week upped its stakes in East Texas with the $2.55 billion buyout of its closely held partner in the Amoruso Field located in the Deep Bossier natural gas play in East Texas, a play that CEO Randy Eresman called "the best emerging unconventional gas play in North America."
The acquisition from Houston-based Leor Exploration & Production LLC includes the partner's 50% stake in Amoruso, which EnCana noted has had two of the five largest U.S. gas wells drilled since 2002. Combined with EnCana's properties, Eresman said, the property holds a potential recovery of 2.4-3.3 Tcf.
"East Texas has the potential to become the top key resource play in our portfolio," Eresman said, which is big talk from Canada's largest gas producer and one of North America's leading independents. "I have often said it was not my intention to make the company bigger but to make it better. This transaction remains true to that goal...The driving force is really the future opportunity the Deep Bossier assets provide."
A lot of big-name gas producers have stakes in East Texas (Devon Energy Corp. and Chesapeake Energy Corp., to name two), but many have migrated toward the Cotton Valley tight gas sands. The Amoruso field, named after the geologist who discovered it, John Amoruso, is adjacent to ConocoPhillips' Savell Field. The Deep Bossier section is mostly interbedded sandstone and shale that roll through a four-county region of Texas (Robertson, Limestone, Freestone and Leon).
The Leor properties have about 200 net well locations, and combined, EnCana estimates it would have 370 drill sites there on 80- to 160-acre spacing. Included in the purchase are 26,600 acres in the Amoruso field and about 29,700 acres of mostly undeveloped land in East Texas.
Eresman, who with EnCana USA President Jeff Wojahn spoke with energy analysts about the purchase in a conference call last week, called the Amoruso Field "one of the fastest-growing natural gas trends in North America. These assets are a seamless fit with our existing production and operations, and they hold tremendous growth potential in the near and longer term." Assuming a $7.50/Mcf New York Mercantile Exchange price, "it is immediately accretive to our share price."
EnCana gained entry into East Texas three years ago with the purchase of Denver-based Tom Brown Inc. (see NGI, April 19, 2004). Two years ago, EnCana paid $80 million for a 30% stake in Amoruso from Leor, and it added a 20% stake last year for $250 million (see NGI, July 31, 2006). As operator of the joint venture, EnCana drilled and operated nearly all of Amoruso's 30 producing wells. In the past two years, production at the field had ramped up from zero to 215 MMcf/d. Eresman said EnCana expects to jump its production to 355 MMcf/d in 2008.
"We entered this play through the acquisition of Tom Brown, and since then the compound annual growth rate has been 40% in this play alone," Eresman noted.
Current production is constrained, but new processing capacity is expected to come onstream in December with the completion of a new gas plant and a gathering system expansion. Gas output is expected to reach more than 220 MMcf/d by year-end and average between 315 MMcf/d and 355 MMcf/d in 2008, which would be more than double the current levels (see NGI, April 9).
The constrained production is nothing like it has been in the Rocky Mountains, said Eresman. "Here we will have a premium netback, and a low differential relative to the Henry Hub. We have accessible markets...and established infrastructure links to the basin and to liquid market hubs. There is available midstream capacity, and growing processing and pipeline infrastructure."
Initial production rates were impressive enough for EnCana to sit up and take notice when Leor indicated it wanted to sell its stake, said Eresman. The private deal, which is expected to close by the end of the year, was "negotiated." Neither he nor Wojahn indicated whether other producers were interested in acquiring the property.
According to EnCana, two of the country's five largest wells since 2002 -- Bonnie Ann 1 and South McLean B1 -- are in the field. Initial gross production rates in these two wells exceeded 50 MMcf/d. Laxson, the most recent Amoruso well, is producing about 65 MMcf/d gross. EnCana has seven rigs working in the field now and expects to increase that to about 10 rigs next year.
"This is a resource acquisition," said Eresman. "We are investing today for tomorrow's reserves and production growth. This acquisition follows our successful practice of entering a play early, locking up a large land position, applying the right technology and generating value that was previously unrecognized. It is similar to what we have done in plays such as Jonah in Wyoming and Cutbank Ridge in British Columbia."
Most of the energy analysts' questions dealt with the nature of the Bossier, which one analyst noted has, for the most part, been considered a "statistical play," which means that while there may be gas reserves, finding and exploiting them on an economical basis has been difficult.
Wojahn did not disagree.
"It has been a tough nut to crack from a 3-D seismic point of view," he said. However, with two years of steady production gains and improved technology, EnCana is certain that it has a winner in hand. Each well, he said, may average between 8 Bcf and 11 Bcf of gas -- which would be well worth the $10 million/well drilling cost, with an estimated ultimate recovery of between 1.3 Tcf and 1.8 Tcf net after royalties. At those rates, the gas produced would be well above production rates in the prolific Piceance Basin -- which is considered the fastest-growing gas play in the country.
"This Deep Bossier play is among the best new unconventional gas properties in North America," Wojahn said. "The Deep Bossier geological trend runs along the well established Bossier shelf, which currently produces more than 1.4 Bcf/d of gas. We have just begun to tap the emerging potential of this deeper accumulation of gas-charged rock. Deep Bossier wells are 15,000 to 20,000 feet deep and intersect shale and sandstone formations that range between 2,000 and 3,000 feet thick."
Wojahn added that "with each well drilled, our initial production rates have increased, and our most recent wells have averaged more than 20 MMcf/d gross during the first month. Over the past two years, we have conducted extensive seismic mapping, advanced our technical understanding of the geology, optimized drilling targets, lowered well costs and improved recovery rates. This acquisition increases our total land over the Deep Bossier trend to about 215,000 net acres."
Wojahn said that "the amount of resource expected to be recovered makes the economics of these wells very attractive," which is why EnCana decided to move when Leor said it wanted to sell. "The value of the play is based solely on the acquisition today. We've been operating in East Texas for more than three years and developing this field for more than two years. Our knowledge and understanding of the trend has grown considerably. This was the right time" to make the acquisition.
Leor management controls 83% of the privately held company. A subsidiary group of Merrill Lynch & Co. Inc. in January invested $150 million in Leor, giving it an undisclosed stake (see NGI, Jan. 29). The equity placement with Merrill Lynch PCG followed the closing of a $150 million three-year revolving credit facility with JPMorgan Chase Bank NA. Goldman Sachs also is an investor.
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