Encana Corp. shocked the markets Tuesday morning when it announced that its $5.4-billion joint venture with PetroChina to develop its Cutbank Ridge assets has been kiboshed. A few hours later, investors have calmed themselves -- for good reason, too.
At midday, Encana's shares are down only about 3 per cent, which demonstrates pretty rational thinking from investors. While the failed PetroChina deal is a big blow for the company, it's not as though Encana is based around this one asset. Plus, the market seems to have expected some uphill battles in getting the joint venture off the ground, most notably federal government approval.
With the PetroChina joint venture out of the picture, Encana still has lots of potential. For starters, back in April, the company said it was looking to start discussions on joint venture proposals for its Horn River and Greater Sierra assets. On the heels of Tuesday's announcement, Encana said that the prospects for these projects are looking up, and raised its 2011 expected proceeds from them to between $1-billion and $2-billion, up from $500-million and $1-billion.
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And earlier this week, Peter Ogden at Bank of America Merrill Lynch released a report that highlighted all of the company's positives. While the PetroChina joint venture was the shining star, there were still many other things to look forward to. Mr. Ogden cited vast land holdings, a strong hedging profile (48 per cent of Encana's 2012 production is hedged at $5.87/mcf) and the stock pays investors a dividend yield of about 2.7 per cent. He also expects strong growth from the company's Haynesville, Montney and Horn River assets.
Taking all of that into consideration, Société Générale may have summarized the PetroChina announcement best. "Today's news won't really affect current operations, but the reduced capital inflow for Cutbank, even with other sales, is a psychological shock...," the investment bank said in a research note.