Encana Corp. (ECA) continued to discard assets Aug. 25 with an agreement to sell its Haynesville natural gas assets in North Louisiana to a subsidiary of GeoSouthern Energy Corp. and GSO Capital Partners LP.
Encana sold 112,000 net acres of leasehold as well as 49,000 acres with mineral rights for US$850 million. The company has had a presence in the shale play for a decade. As part of the deal, Encana will also reduce its gathering and midstream commitments by US$480 million.
Encana will transfer its current and future midstream obligations on an undiscounted basis. Encana will transport and market GeoSouthern's Haynesville production on a fee-for-service basis for the next five years.
The buyer, GEP Haynesville LLC, is a joint venture formed by GeoSouthern Haynesville LP and funds managed by GSO. GeoSouthern Energy was formed in 1981 by George Bishop. The privately held E&P company is perhaps best known for its 2014 sale of Eagle Ford assets to Devon Energy Corp. (DVN) for $6 billion.
Encana, which was believed to be marketing the Haynesville assets since April, remains focused on growing high-margin production. More than 80% of 2015 capital will be invested in the company’s most strategic assets: the Permian, Eagle Ford, Duvernay and Montney, where it is spending 80% of its budget.
Encana, which is focusing more of its portfolio on liquids, may not be done trimming its assets.
“Other assets that we believe could be on the chopping block include the San Juan and D-J Basin,” said Patrick Rigamer, senior E&P analyst, Global Hunter Securities.
Encana was able to sell its assets at about $3,900 per thousand cubic feet equivalent per day (Mcfe/d) for existing production—$5,600 per Mcfe/d including the discounted relief on its midstream obligations—and $7,600 per acre for its proved reserves, Rigamer said.
Encana operates about 300 wells in the area. Estimated year-end 2014 proved reserves were 720 Bcfe of natural gas.
During the first half of 2015, Encana's Haynesville assets produced an average 217 MMcf/d, making up 9% of companywide production and less than 2.5% of first-half operating cash flow, excluding hedges.
Encana will use the proceeds to improve its balance sheet, keeping its net debt to EBITDA ratio “comfortably below 3x at year end 2015,” Rigamer said.
Encana acquired its first Haynesville lease in 2005 and drilled its first vertical wells in 2006. The company’s website says it holds more than 350,000 acres of land in the area. In 2008, Encana purchased Texas and Louisiana Haynesville shale acreage for more than $1 billion. The deal brought the company’s position to 435,000 net acres.
Doug Suttles, president and CEO, said that Encana has taken another step toward advancing its strategy to pare down noncore assets—particularly those with natural gas.
“By further focusing our portfolio, we are making Encana more efficient as we proceed through the second half of 2015 and into 2016,” he said. “This transaction delivers significant proceeds that we'll use to strengthen our balance sheet. In addition, it eliminates our midstream commitments in the Haynesville and captures ongoing revenue upside through a gas marketing arrangement.”
David Kistler, co-head of E&P research, Simmons & Co. International, said that on an undiscounted value and including Encana’s gathering and midstream obligations the transaction works out to a value of $36,774 per barrels of oil equivalent per day (boe/d).
“While the transaction also includes 112,000 net acres of leasehold, plus additional fee mineral lands, the flowing valuation metrics screen attractive when compared to a gas levered E&P like Chesapeake Energy (CHK) at $17,490 boe/d.”
Chesapeake has significant exposure to the Haynesville and a similar deal would allow it to unburden its midstream obligations, Kistler said.
“However, one transaction does not make a trend and some investors may question if there is an appetite for more of the same,” Kistler said.
Contact the author, Darren Barbee, at firstname.lastname@example.org.
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