As some industry observers had been expecting, EnCana Corp. (NYSE: ECA) will dip into its substantial reserve of dry powder for a large acquisition-Tom Brown Inc. (NYSE: TBI). Calgary-based EnCana will pay US$2.7 billion in cash and assumed debt for Tom Brown, Denver. The price-US$48 per Tom Brown share-represents a 24% premium for the Rockies-focused producer. "The U.S. Rockies have been EnCana's highest-growth region and this acquisition is anticipated to take our U.S. gas production to 1 billion cu. ft. per day," says Gwyn Morgan, EnCana president and chief executive. The purchase is expected to add about 325 million cu. ft. equivalent per day of current gas production, about 1.2 trillion cu. ft. of proved gas reserves and about 2 million net undeveloped acres to EnCana's portfolio. The analysts at Friedman Billings Ramsey say the all-in acquisition cost of US$2.25 per thousand cu. ft. equivalent is a "full price" for the assets. "We do believe that the deal will create value for the company in the long term, but the high acquisition cost does hurt the near-term valuation [of EnCana]," they say. However, of the total acquisition price, EnCana says it has assigned approximately US$358 million to undeveloped exploration land, certain midstream assets and Tom Brown's Sauer Drilling Co. Accordingly, the price for proved reserves is US$1.95 per million cu. ft. equivalent. "EnCana has been built upon long-life, low-production-cost, high-quality assets that have enabled us to forecast 10% per share average annual growth from existing assets, without the need to acquire," Morgan says. "However, we have also maintained a strong balance sheet, which places us in an advantageous position to build the net asset value of our total portfolio by adding similar, high-quality assets such as Tom Brown." EnCana plans to put on the market its conventional noncore properties in western Canada that produce between 40,000 and 60,000 BOE per day. The divestment is expected to fetch an estimated US$1- to US$1.5 billion. EnCana's strategy is to unload lower-return and oil assets, and build up its North American gas portfolio, says Brian Prokop, an analyst with Peters & Co. The conventional western Canadian properties now on the market are mature and have little upside, which makes them unattractive to EnCana, but they may be desirable by the active Canadian royalty trust sector, Prokop adds. Pro forma the acquisition and the planned divestitures, EnCana's 2004 U.S. production is expected to increase from 18% to 24% of total production. Long-life, low-decline resource plays are expected to rise to about 75% of its North American production, from 67% currently. Since 1998, Tom Brown has grown its production 18% per year from the Piceance, Green River, Wind River, Paradox, East Texas, Permian and Western Canada Sedimentary basins. These are early-life properties where Tom Brown has identified an estimated 3,200 drilling locations. Full-cycle finding and development costs, including the acquisition cost and all future development costs, to exploit the expected recoverable reserves are anticipated to be about US$1.50 per thousand cu. ft. -Jodi Wetuski