Encana Corp. is selling oil and gas properties in Colorado to a partnership led by Canada Pension Plan Investment Board for $900-million (U.S.) as energy deals pile up following a months-long drought.
Encana is jettisoning its Denver Julesburg Basin (DJ Basin) shale assets in northeast Colorado to the partnership, which is 95 per cent owned by CPPIB and the remainder by Broe Group, a Denver-based investment management firm. The partners plan an active drilling program.
The deal shows how the downturn in energy markets has forced companies like Encana to hone their holdings and efforts. The DJ Basin was one of five assets that chief executive officer Doug Suttles had pinpointed, during his strategic retooling in 2013, as key to the company's future.
The following year, Encana spent $9-billion on new operating areas in the oil-rich Eagle Ford and Permian regions of Texas, shifting its focus away from the DJ. Now, overall capital spending has shrunken.
"Those two plays are delivering even higher returns than the DJ, so from a portfolio-management perspective, particularly in the context of where oil prices are sitting currently and expected to be for the next little while, it was unlikely that the DJ was going to attract much capital," said Chris Feltin, analyst at Macquarie Capital Markets.
Indeed, this year, as sub-$50-a-barrel oil prices have limited the amount companies can plow into operations, Encana is spending 80 per cent of its budget in Texas and in two Western Canadian plays, the Montney and the Duvernay shale, Encana spokesman Simon Scott said.
In August, Encana sold another natural gas property, the Haynesville in Louisiana, for $850-million.
The DJ sale adds to an already busy month for energy deals following a slow stretch in which would-be buyers were waiting for killer bargains and sellers were hoping for a rebound in oil prices to help boost asset values.
On Monday, Suncor Energy Inc. launched a $4.3-billion (Canadian) hostile offer for Canadian Oil Sands Ltd., its partner in the Syncrude Canada oil sands joint venture. In response, Canadian Oil Sands has adopted a shareholder-rights plan as it examines its next move.
Superior Plus Corp. announced it was buying Canexus Corp. in an all-stock deal worth more than $320-million. Last week, Penn West Petroleum Ltd. sold its stake in a Saskatchewan oil-producing property for $205-million to a U.S. pension fund.
Investor expectations of more merger-and-acquisition activity has lifted the Toronto Stock Exchange's oil and gas group more than 16 per cent since the start of October.
CPPIB has been among institutional investors keenly circling oil and gas industries amid tumult in the energy sector. The fund has touted its deep pockets and long-term investing capabilities.
The acquisition comes on the heels of the creation of a $1-billion vehicle a week ago to invest in pipelines and processing plants in Western Canada alongside Wolf Infrastructure Inc. Broe Group has assets in real estate, transportation and energy.
"Over the course of the last year, we've been evaluating all of the producing basins in North America and it really highlighted the DJ Basin in particular as one we'd like to acquire a leading position in," said Avik Dey, managing director and head of natural resources at CPPIB.
"More importantly, that development in the DJ Basin yields attractive economics. As we evaluate that play, it has highlighted itself as one of the more economic plays in North America."
The assets produce 52 million cubic feet of natural gas and 14,800 barrels of oil and gas liquids a day on 51,000 acres, which was about 6 per cent of Encana's total output. Proved reserves are pegged at 96.8 million barrels, 40 per cent of which is natural gas.
Wells in the region cost about $4-million (U.S.) each and the partners expect to drill hundreds over time. Mr. Dey said they would consider acquiring additional properties in the area.
So far this year, Encana has sold $2.7-billion worth of assets and it expects to pay down its debt by $3-billion by the end of 2015.
"Being able to get off any kind of non-core asset in a market where there are far more sellers than buyers is a positive step, and for Encana it's incrementally positive that they can ratchet down their debt with this deal," Mr. Feltin said.