Canada's Encana Corp. will sell a 40 percent stake in British Columbia natural-gas assets to Japan's Mitsubishi Corp. in a C$2.9 billion ($2.9 billion) deal that will help the energy company strengthen a balance sheet weakened by low gas prices.
The agreement to sell Mitsubishi a stake in the massive Cutbank Ridge field in the Western Canadian province, coming as Encana announced an 8 percent fall in fourth-quarter operating profit, is the latest in a string of asset sales by the Calgary-based energy producer.
For Encana, Mitsubishi effectively replaces PetroChina Co. Ltd. as the deep-pocketed Asian partner it has long sought. A more ambitious C$5.4 billlion joint-venture agreement between Canada's No. 1 gas producer and the state-controlled Chinese company collapsed last June when the two sides broke off talks over final terms.
[The Mitsubishi deal] provides them some wiggle room for 2012 and into 2013, said Chris Feltin, an analyst at Macquarie Capital Markets. It shores up the balance sheet and provides some visibility on the sustainability of the dividend. ... I wouldn't mind seeing more asset sales or [joint ventures] but overall now Encana is in much better shape.
Encana also said it is looking for deep-pocketed partners for some other holdings, and it wants to plow money into developing high-value liquids-rich assets such its undeveloped Tuscaloosa Marine shale deposit in Louisiana. In addition, it said it will cut its output of low-value dry gas by about 15 percent this year as it holds out for higher natural-gas prices.
Encana and its rivals are struggling to cope with weak gas prices, currently hovering near decade lows, as a mild winter throughout North America cuts into demand, while production and thus supply rises. The weakness in gas prices is driving oil-and-gas companies to focus on liquids-rich deposits.
Mitsubishi has agreed to pay C$1.45 billion for the stake in Cutbank Ridge in a deal that will close this month. The Japanese trading house will also invest a further C$1.45 billion in the project over five years, in addition to its 40 percent share of the project's future capital investment.
The investment by Mitsubishi reflects the value of a well-delineated world-class resource play that is being developed in a highly efficient manner, Randall K. Eresman, Encana's CEO, said on a conference call. This partnership provides an excellent analog for what we expect to achieve in several other plays throughout our portfolio.
The assets in the partnership will include 409,000 net acres of undeveloped Montney lands in British Columbia, in addition to development potential in the Cadomin and Doig formations. Encana will serve as managing partner and operator of the partnership.
The deal does not include any of Encana's current Cutbank Ridge production of about 600 million cubic feet of natural gas per day, processing plants, or gathering systems. It also does not include any of the company's Alberta landholdings.
The Cutbank Ridge partnership lands have proved undeveloped reserves of roughly 900 billion cubic feet of natural-gas equivalent, Encana said.
After the close of the Cutbank Ridge deal, the company expects to have more than $3 billion in cash and cash equivalents on its balance sheet.
Encana announced roughly $3.5 billion worth of asset sales last year, most involving gas-processing plants in Canada and the United States.
Encana shares rose as much as 4 percent to C$21.14 in early action on the Toronto Stock Exchange on Friday, but later fell back to trading almost unchanged at C$20.13.
The company reported a fourth-quarter operating profit of $46 million, or 6 cents a share, down from $50 million, or 7 cents a share, a year earlier.
Encana's net earnings were hurt by an after-tax noncash asset impairment charge of $854 million triggered by lower natural-gas prices and a change in future development plans. That compared with a similar charge of $371 million in the same quarter in 2010
The results in the latest quarter benefited from a large unrealized hedging gains and gains from divestitures.
On a net basis, Encana reported a loss of $246 million, down from a year-earlier loss of $469 million, when hedging losses and losses from divestitures weighed.
Cash flow, a key indicator of its ability to pay for new projects and drilling, rose 6.4 percent to $976 million.
Quarterly natural-gas production rose 7 percent in the fourth quarter to 3,459 million cubic feet of gas per day (mmcf/d), while liquids production rose 17 percent to 23,938 barrels of liquids per day.
Encana's 2012 capital investment plan of $2.9 billion represents a decrease of about 37 percent from 2011 levels.
(Reporting by Scott Haggett, Euan Rocha in Toronto and Aftab Ahmed in Bangalore; Editing by Peter Galloway)