When Encana Corp. bulked up on $9-billion (U.S.) of U.S. shale assets this year, a barrel of oil was fetching $94 or higher. Now oil prices have collapsed to below $56, and investors are wondering how the big energy company expects to fund drilling and expansion amid dwindling cash flow expectations.
Encana released its 2015 budget Tuesday as oil prices hang out near five-year lows. Investors are questioning how much money the company can profitably sink into new properties in the Eagle Ford and Permian Basin regions of Texas, as well as its other resource plays in North America.
Chief executive Doug Suttles has completed a couple of multibillion-dollar deals to focus Encana on oil, while deemphasizing natural gas. To free up cash and advance his strategy, he has sold billions of dollars worth of non-core assets. Now, a large package of so-called midstream oil and gas pipeline and processing holdings in Alberta and B.C. may be the next major sale.
Encana is in "advanced" negotiations regarding midstream assets in the Montney region straddling the Alberta-British Columbia border, Mr. Suttles confirmed Tuesday during a conference call about the company's budget. Encana expects to collect about $800-million from asset sales in the first quarter, including cash from the previously-announced sale of the majority of its Clearwater assets for $605-million (Canadian), he said. The "anticipated" deal tied to the Montney midstream assets, Mr. Suttles said, will be part of the $800-million total. He did not identify the potential buyer.
The Montney is one of several areas that Mr. Suttles has said is core to Encana's future. Selling midstream assets would be to plan future expansion with the buyer. Potential buyers include Veresen Inc., the expanding energy infrastructure company. Encana and Veresen have done business before. In 2012, Veresen bought Encana's Hythe/Steeprock gas gathering and processing complex in Alberta and B.C. for $920-million.
Meanwhile, KKR & Co., the U.S.-based private-equity firm led by Henry Kravis and George Roberts, has been mentioned as being involved. Earlier this year, KKR set up a $2-billion fund to invest in unconventional North American energy. It also opened an office in Calgary, run by Brandon Freiman.
A transaction may involve a long-term agreement to process and transport Encana's production, as well as invest in expansions of the infrastructure. A private-equity participant could provide the necessary capital to expand the network.
Veresen and KKR did not respond to requests for comment.
Encana's big acquisitions of oil assets earlier this year are increasingly looking like top-of-the-market deals. Mr. Suttles said last month the company would spend "substantially" more than the $2.5-billion to $2.6-billion it had budgeted for this year, though that was assuming oil prices above $80 a barrel. U.S. crude sold for $55.91 on Monday, likely setting the stage for a less enthusiastic spending plan.
Tuesday's conference call saw Encana back off from Mr. Suttles' declaration about spending substantially more in 2015. The company now expects to spend between $2.7-billion and $2.9-billion next year, according to the budget it released Tuesday.
At $13.53 (Canadian), down 4 per cent on Monday alone, Encana's shares are worth a little more than half what they were in June, after the company completed its spinoff of PrairieSky Royalty Ltd., the most valuable Canadian initial public offering in 14 years. At the time, some investors were hailing Encana's turnaround as complete. The contrast shows just how much the global oil glut and skidding prices have hampered Encana and its peers in the sector.
On Monday, Bank of Montreal analyst Randy Ollenberger chopped his rating on Encana shares to "market perform" from "outperform," and slashed his 12-month target price to $16 from $28, citing the company's coming struggles to fund its planned expansion through cash flow and debt.
"In hindsight, Encana's switch into liquids resource plays was largely completed near the peak of the cycle at elevated valuations, which has left the company relatively highly levered and with few options to fund its aggressive liquids growth strategy in the current commodity pricing environment," Mr. Ollenberger wrote in a report.
That puts potential asset sales – a top funding option for Encana in years past – higher on the agenda.
Oil patch officials and advisers who declined to speak on the record said companies are reviewing assets to raise capital at a time swooning oil prices have shut off conventional debt and equity financing sources. "Assets are the new capital. You are going to see a number of divisions spun off by companies in need of cash," said one industry veteran who is a director with a number of Canadian energy companies.
Some potential purchases are being driven by U.S. private equity funds who are drawn to more stable assets such as infrastructure.
Private equity funds had traditionally avoided energy investments because of commodity price volatility. In recent years, however, a number of major funds such as KKR and Blackstone Group have launched funds dedicated solely to energy.
With files from Jacquie McNish