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Encana Hunts for North American Drilling Partners

April 9, 2012
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Calgary-based Encana Corp. confirmed last week that it is looking for a partnership to help finance some of its North American oil and liquids-rich opportunities.

The news comes as the price of natural gas holds at decade lows and gas storage facilities remain filled to the brim.

"We continuously look for opportunities to manage our asset portfolio and enhance the long-term value creation of those assets," said CEO Randy Eresman. "Accelerating the rate of development on our oil and liquids-rich land holdings can be achieved by leveraging third-party capital, which shortens our development timelines, reduces our cost structures and allows us to realize the value we have captured in these opportunities at an earlier stage.

"At the same time, we continue to believe in the long-term future of natural gas and are investigating the potential for additional long-term partnerships targeting the future development of portions of our natural gas lands."

In the USA Division, Encana plans to "accelerate the commercialization" of about 1.2 million net acres within its holdings in the Tuscaloosa Marine Shale, which straddles the Mississippi and Louisiana border; the Utica/Collingwood formations in Michigan; the Eaglebine play in East Texas; and the Mississippian Lime in Oklahoma and Kansas.

In the Canadian Division, the producer is marketing "partnership opportunities" that cover around 375,000 net acres in Alberta's Duvernay shale.

"At this point, it is premature to speculate on the size or value of any potential transaction," said Eresman. "We are marketing an interest in these assets in which Encana would continue to operate and retain majority ownership."

Encana's 2012 capital budget directs more than half (55%) of upstream expenditures toward "the exploration, delineation and development of our oil and liquids-rich opportunities," he noted. "Over the past two years, we have increased our prospective oil and liquids-rich holdings, and we plan to develop them using the same methodology we apply to our natural gas plays -- through a low-cost entry approach and a firm focus on improving operating efficiencies and lowering our cost structures."

Late last month Eresman said in Singapore the company was hoping to find a partner or partners to help develop some of the portfolio. He told reporters that he would prefer to do something similar to the transaction secured by Devon Energy Corp. early this year with China's Sinopec International Petroleum Exploration & Production Corp., which agreed to invest $2.2 billion in exchange for one-third of Devon's stake in five venture plays (see related story and NGI, Jan. 9).

Encana is no stranger to partnerships with foreign entities. In February it sold Mitsubishi Corp. for $2.9 billion a 40% stake in 409,000 net acres of the prospective Cutbank Ridge leasehold in British Columbia (see NGI, Feb. 20). Cutbank Ridge holds estimated proven undeveloped reserves of about 900 Bcfe.

At the time of the Mitsubishi announcement, Eresman said, "You could see Mitsubishi-like deals. We also are evaluating a Devon-like deal...as a means to advance multiple oil and liquids-rich plays in North America."

Encana possibly could do a deal with Petroliam Nasional Berhad, otherwise known as Petronas, Malaysia's state-owned oil company. In addition to looking for a partner for liquids developments, Eresman also has indicated that he might be open to commercializing the company's 30% stake in KM LNG, a liquefied natural gas export (LNG) terminal to be sited in Kitimat, British Columbia (BC) with units of Apache Corp. (40%) and EOG Resources Inc. (30%).

Petronas CEO Shamsul Azhar Abbas told reporters in late March that the company was looking for natural gas acquisitions in Canada worth more than C$5 billion in an effort to secure LNG supplies for Asia. A possible transaction, he said, could be announced within three months.

The likely candidate for an outright takeover by Petronas is Progress Energy Resources Corp., which last year agreed to sell a half stake in some Montney Shale land in BC for C$1.07 billion (see NGI, June 6, 2011). The joint venture (JV) agreement included developing LNG opportunities.

"For Petronas, Progress is the most logical acquisition target, if they truly are looking for a West Coast LNG solution, because they've already JV'd with them," said Sprott Asset Management portfolio manager Eric Nuttall. However, Petronas also may be looking for "five $1 billion JVs...versus one corporate," which would make Encana's latest offers possibly more enticing.

Canaccord Genuity's Phil Skolnick said Petronas also could look to Encana for more LNG expertise -- especially since Encana already is a partner in an LNG export facility that has been approved, and it's Canada's largest gas producer. "Partnering up with national companies would help to expedite an LNG movement out of Canada," said Skolnick.

Coincidentally, Petronas last week awarded a contract to Fluor Corp. for front-end engineering and design services for a new LNG regasification terminal in Malaysia, which would supply gas to an adjacent 300 MW combined-cycle power plant. No details were provided on from where the LNG supplies would come.

Meanwhile, Moody's Investors Service affirmed Encana's ratings to reflect its "significant size, scale and diversity of operations that afford the opportunity to generate significant alternate liquidity through asset sales," which should enable the company to secure a transition to a "transition to a more liquids-rich production mix from existing property holdings without increasing debt levels," said Senior Vice President Terry Marshall.

"Encana's current production is about 95% gas, which is problematic at current low prices, but we believe Encana can successfully transition to more liquids production. Encana's track record as a first mover in new resource plays and a successful developer and operator are skills that should transfer to the development of more liquids-rich opportunities."

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