In a dramatic move that shows its unwavering focus on its unconventional North American natural gas business and oilsands operations, EnCana Corp. announced a $2.1 billion sale Friday of its entire United Kingdom North Sea oil assets, including a 43.2% interest in the massive Buzzard oil field, to Nexen Inc. EnCana also said it plans to sell its Gulf of Mexico holdings and exit Ecuador in 2005.
“EnCana intends to further sharpen its focus on its industry-leading position in long-life North American natural gas and oilsands resource plays through the future disposition of its Ecuadorian and Gulf of Mexico interests,” said EnCana CEO Gwyn Morgan.
Nexen CEO Charlie Fischer called the North Sea assets “the most attractive suite of assets I’ve seen available for purchase in quite some time, and they have significant upside potential beyond our expected case.”
He said the acquisition will “establish us as a significant player in the region, with concentrated assets, infrastructure and significant exploration and development potential for future growth. It will also add significant high margin reserves and production, diversify our worldwide portfolio by adding strong assets in a stable jurisdiction and complement the longer cycle-time projects we have in the Athabasca oil sands, offshore West Africa, and the deep-water Gulf of Mexico.”
Fischer called the Buzzard field in particular an “outstanding asset with a high quality reservoir which is comparable to some of the most prolific discoveries in the basin. Over time, we believe the recovery rates from this field could ultimately exceed the rates forecast in our evaluation.” He also said the North Sea assets would “provide the flexibility to effectively manage the declines we are currently seeing in Canada and at Masila in Yemen.”
In addition to the Buzzard field stake, the sale to Nexen includes a 41% and 54.3% interest, respectively, in the Scott and Telford oil fields, other satellite discoveries, plus interests in exploration licenses covering more than 740,000 net acres in the North Sea. Nexen said it would finance the deal with $600 million in cash on hand and bridge financing. The debt will eventually be reduced by cash flow. The company also expects to raise cash by selling a slate of Canadian conventional oil and gas assets by mid-2005.
Proved reserves associated with the U.K. operations are about 129 million boe and production during the first nine months of 2004 averaged 23,200 boe/d. The Buzzard field, located 62 miles northeast of Aberdeen, Scotland, is scheduled to begin production in 2006 and reaching peak production of 200,000 bbl/d (80,000 bbl/d net to Nexen).
“We fully recognize that the Buzzard project is a world class development, with potential upside,” said Morgan. “However, the U.K. asset sale presents an opportunity to capture substantial immediate value for our shareholders at a time of high oil prices.” EnCana expects to pay no taxes on the transaction and record a gain of more than $1 billion.
“We are more convinced than ever that the future of oil and gas growth in North America resides in unconventional assets,” said Randy Eresman, EnCana’s COO. “It’s what we know best and it is what we are best at.”
The Ecuador and Gulf of Mexico assets divestitures are expected to occur in 2005. They include valuable conventional properties that EnCana has moved to non-core status because they no longer fit in its “resource play” focus.
In the Gulf of Mexico, the company has stakes in a number of promising conventional oil discoveries, including 25% of Tahiti, Tonga, Sturgis, Jack, a 6.25% interest in St. Malo discovery and an average of 40% in 224 exploration blocks covering 516,000 net acres.
The Ecuador assets include interests in five Oriente Basin blocks with 77,100 bbl/d of oil production, $252 million of operating cash flow after hedging in the first nine months of 2004 and 162 million bbl of proved reserves. The assets also include a 36.3% interest in the OCP Pipeline.
Following the sales of these assets, 100% of EnCana’s production will be from onshore North America. Natural gas and natural gas liquids (NGLs) will comprise about 80% of the company’s production and an even higher portion of operating cash flow. Resource plays will represent about 75% of its daily North American output, and this ratio is expected to grow steadily through a combination of mature conventional asset dispositions and deployment of capital into resource play development.
EnCana has 9.4 Tcf of proved gas reserves and 16 Tcf of unbooked resource potential. At current production rates, its expected resource life is more than 20 years. The company’s oilsands lands hold more than an estimated 30 billion bbl of oil in place.
“Conventional North American production has entered into a classic period of increasing costs and accelerating decline rates,” said Morgan. “We expect that onshore North America’s future will be dominated by unconventional tight gas and oilsands, which we classify as resource plays. Resource plays represent a paradigm shift — in other words, unconventional thinking. For example, in contrast to conventional reservoirs, typically resource play decline rates and costs decrease, and cumulative booked reserves increase over time.”
Morgan said EnCana’s focus is now on basin-centered sand, carbonate and coalbed natural gas accumulations in Western Canada, the U.S. Rockies and Texas, and in-situ recovery from oilsands resources.
Eresman also noted that the company’s resource plays have become increasingly economic with today’s technology and commodity pricing. “EnCana’s manufacturing-style resource play management approach, which focuses on scale, cost control and continuous learning, has contributed to EnCana earning its cost of capital at less than half of today’s commodity prices,” said Eresman. “Our disciplined pursuit of these unconventional assets has enabled us to become North America’s largest, lowest operating cost, natural gas producer. However, our 3 Bcf/d of production represents only around 5% of the North American market, so there’s plenty of room to grow.”
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