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Encana Inks $735M Deal to Offload Piceance Basin Assets

Zacks

Canadian natural gas producer Encana Corporation ECA recently clinched a $735 million deal to offload assets in the Piceance Basin on Colorado’s Western Slope. This marks the end of Encana’s 15 years run in the basin.

The company will sell the assets to a Denver-based private upstream player Caerus Oil and Gas LLC. The deal will advance Encana’s strategy to concentrate on its four core basins.

Notably, Encana which once held the top position in the Piceance Basin in terms of acreage, unloaded 51,000 acres in northeastern Colorado and over 3000 wells to Crestone Peak Resources in 2016. Hit by weak commodity prices, a number of companies have exited Piceance to pursue oil-based projects elsewhere.

Deal Highlights


Per the deal, Encana will divest over 550,000 leased acres and 3,100 operated wells. The assets produced about 240 million cubic feet per day of natural gas and 2,178 barrels per day of liquids in the first quarter of 2017, with estimated proved reserves of 814 billion cubic feet of gas equivalent at the end of 2016. Further, Encana will also get rid of $430 million of contractual pipeline obligations, with Caerus taking over these commitments. Post the completion of the deal, around 140 employees working on Colorado’s Western Slope are likely to join Caerus.

The $735 million deal will be funded entirely by cash. The agreement is scheduled to close in the third quarter of 2017, subject to regulatory approvals and other satisfactory closing conditions.

Deal Motive

The agreement is in sync with the Encana’s strategy to streamline its portfolio and focus on its four chief asset plays – the Montney and Duvernay gas formations in British Columbia and Alberta and the Permian and Eagle Ford formations in Texas. The transaction will streamline the company’s portfolio through the sale of non-core assets and help them to refocus their production spending in core plays and fewer geographical areas.

In addition to the cash received, Encana will also benefit by reducing its midstream commitments by about $430 million. The sale of Piceance assets is likely to make Encana more efficient and strengthen financials. The proceeds from the sale are likely to be utilized by the company to repay the debt, which amounted to around $4.2 billion at the end of the first quarter.

With the deal, Caerus will acquire one of the biggest positions in Colorado’s western counties. Acquiring over 3,100 wells from Encana, Caerus will increase its existing number of wells by about four times. The transaction bodes well for Caerus as it is expected to gain synergies and leverage the high quality natural gas asset along with skilled manpower.

Caerus has been increasing its acreage in the Piceance basin over the years by entering into acquisition deals. In 2013, the company struck a $200 million deal with Denver’s PDC Energy, Inc PDCE to acquire its oil and gas wells in the region. In 2014, Caerus increased its holdings in the basin by inking a deal with Noble Energy Inc. NBL. Further, in Apr 2016, Caerus was the buyer of Marathon Oil Corporation’s MRO $80 million divestiture in the region.

Zacks Rank

EnCana is one of the world's largest independent natural gas producers and gas storage operators. The company under the Zacks categorized Oil and Gas Exploration & Production Canadian currently carries a Zacks Rank #3 (Hold).

Encana Corporation Price

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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