Encana sells Horseshoe Canyon stake to Toyota Tsusho for $602 million

Natural gas producer monetizes coalbed methane interest in southern Alberta

 

By Dina O'Meara, Calgary Herald April 21, 2012 1:52 PM

A deal with Toyota Tsusho Corp. will see Encana Corp. continue coalbed methane development at Horseshoe Canyon, southwest of Drumheller in southern Alberta. Photograph by: Colleen De Neve , Calgary Herald

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CALGARY — Encana Corp. has sold a third of its interest in a heritage coalbed methane field to Japan’s Toyota Tsusho Corp., advancing its drive to develop partnerships in a low-price environment.
The $602 million deal was the second in as many months struck between the Calgary company and Japanese interests, as the Pan Asian nation scurries to secure energy resources following the forced shutdown of most of its massive nuclear power plants.
The firm acquires an interest in production only, and will have no stake in the land
Encana, Canada’s top independent natural gas producer, said the partnership recognized the value of the low-cost, low-risk asset.
“This relationship with Toyota Tsusho, a world-class leader, offers strong synergies that have the potential to foster expanded business opportunities,” said chief executive Randy Eresman in a statement Friday. “Further, this agreement serves as a model for other investment opportunities and supplies capital investment to preserve the value and efficient development of Encana’s shallow gas lands in Alberta that have contributed long-life production for more than five decades.”
Toyota Tsusho put a $100 million down payment toward a 32.5 per cent interest in the Horseshoe Canyon play in southern Alberta this week to close the deal, with commitments to invest the remainder within seven years.
The coalbed methane field forms part of Encana’s so-called fee lands acquired in the early 1900s under a deal which granted its predecessor surface and subsurface mineral rights. Natural gas production from the area marked in Friday’s deal has averaged about 120 million cubic feet per day, Encana said.
The 480,000 acre acreage represents about a quarter of the company’s total coalbed methane interests in Alberta, an area slated for maintenance rather than growth as Encana targets more profitable oil and liquids-rich gas.
“What it does is it maintains the ongoing program in the area to preserve capital and operational efficiencies,” spokeswoman Carol Howes said.
Natural gas prices have dropped by 50 per cent this year as a mild winter failed to draw down high storage inventories, creating a supply-demand imbalance already tilted downward. Futures were trading around $1.90 US per million British thermal units Friday afternoon in New York.
Toyota Tsusho invested top dollar for its stake in the play, analyst Andrew Potter said in a note to clients.
The Japanese corporation paid $3.86 per thousand cubic feet equivalent for proven plus provable reserves compared with the investment bank’s 54 cents per mcfe valuation for all of Encana’s proven plus probable Canadian reserves, Potter, with CIBC World Markets, said.
“While we have seen a large influx of Asian capital into Western Canada, today’s announcement is different,” he said. “Instead of targeting vast undeveloped Montney or Horn River resources with potential liquefied natural gas development, this transaction focuses on more mature production with no LNG monetization options.”
In February, Encana inked a $2.9 billion deal with Mitsubishi Corp. for 40 per cent of its undeveloped Cutbank Ridge property in northeastern British Columbia. The partnership, as Friday’s announcement, left Encana as the operator, with the Japanese covering project costs over then next five years.
PAGEBREAK“It’s pretty clear that the Japanese are keen to replace a lot of the nuclear power generating capacity that they’ve got, so they’ve been pretty aggressive in terms of chasing down natural gas,” said Randy Ollenberger, with BMO Capital Markets. “I think we’ll see more Japanese joint ventures or even direct acquisitions in the natural gas business in North America.”
Japan would have to come up with an incremental 10 bcf per day of gas supply to power its generation needs.
Ollenberger noted Encana stock, which has dropped 46 per cent since last May, was being hit by investor sentiment dictated by poor natural gas prices. The company financially is in good shape, with $5 billion in undrawn credit lines and up to $2 billion in available cash, but their commodity not the right one for current markets, he said.
Shares of Encana Corp. traded down five cents to $17.95 US Friday afternoon.
domeara@calgaryherald.com