If you’re a natural gas producer and you expect prices to remain low in the near future, there’s only so much you can reduce capital spending to preserve cash. At some point, you may need to take the plunge to sell-off assets.
The industry appears to be at this point. Earlier this week, Chesapeake Energy Corp. announced that it will sell $10-billion to $12-billion (U.S.) of non-core assets to raise cash amid decade-low natural gas prices. And on Friday, Encana announced a $2.9-billion (Canadian) joint venture, selling off a 40 per cent stake in its Cutbank Ridge Partnership.
For agreeing to the sale, Encana will receive $1.45-billion in cash up front, and the remainder to be carried over five years.
You will recall that this isn’t the first time that Encana has tried to strike a joint venture for this asset in northeast British Columbia and northwest Alberta. In 2010 the firm struck a $5.4-billion 50-50 joint venture with PetroChina, but that deal fell apart just two months later because the two firms couldn’t agree on valuations. So it’s not as though Encana only thought of this sale as it scurries to raise cash in a weak natural gas environment.
Still, the firm acknowledges that it’s rough out there. The slide deck for its latest conference call includes a slide dedicated to “adapting to a low gas price environment.” The bullet points include pursuing oil and natural gas liquids opportunities and leveraging third-party capital, explicitly listing farm-outs and joint ventures at Horn River, Cutbank Ridge, Piceance and Jonah.
EnCana also severely slashed capital spending for 2012. This year the company expects to spend $2.9-billion (U.S.), much lower than the $4.6-billion it shelled out in 2011. The firm will also shift its focus away from dry gas and will plow money into liquids-rich plays like Duvernay and Tuscaloosa.
This cut to capital spending simply echoes a widespread trend across the industry.
Though Encana is parting ways with a 40 per cent stake in a quality asset, the response has been quite favourable from the investment community this morning. Encana is getting $17,726 per acre of undeveloped land and most people say the deal is valued quite nicely considering the PetroChina deal was priced in a much stronger natural gas environment.
As for differences between the two deals, the latest is solely for undeveloped land, while the PetroChina deal include included some Cutbank production and Alberta landholdings.
RBC Dominion Securities and Jefferies & Company advised Encana, while Barclays Capital advised Mitsubishi on financial matters and Bennett Jones served as legal advisor.