PetroChina, EnCana Form JV

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Formation of JV to develop Duvernay shale in Canada.

The price for the announced joint venture between Encana (NYSE: ECA) and a subsidiary of PetroChina seems high, but the potential for development is so great that it will likely inspire similar deals, according to an analysis from Global Hunter Securities.

Last week Encana Corp. announced a joint venture with a subsidiary of PetroChina to explore and develop its Duvernay land holdings in west-central Alberta. The subsidiary of PetroChina, Phoenix Duvernay Gas, will gain a 49.9% interest in Encana’s 445,000 acres in the Duvernay play for about C$2.18 billion.

At closing, Encana received C$1.8 billion and is scheduled to receive an additional C$1 billion during the next four years to carry half of its share of development capital. During this period, Encana and PetroChina plan to spend a total of C$4 billion in additional drilling, completion and processing facilities.

Encana estimates that the Duvernay joint venture lands contain about 9 billion barrels of oil equivalent (BOE) of petroleum initially-in-place. Encana remains the operator of the joint venture with its 50.1% working interest.

The implied price for the joint venture is around $9,800 per acre, which will likely encourage all producers to drill a total of 200 wells in the region during the same time period, Global Hunter Securities reported. Well costs are in the range of $10 to $15 million, depending on the number of fracturing stages and the method used for stage separation. This cost should fall to between $8 million and $12 million with the additional activity and the implementation of PAD drilling, it stated.

Global Hunter reported that condensate yields in the play are high. “Some producers estimate liquids from Duvernay wells could receive prices at approximately 80% of Edmonton Par oil. Typical liquids yield appears to be in the 80-200 bbls per MMcf range, and although the wells are expensive they do appear to create significant value,” Global Hunter reported.

“We expect Duvernay lands will continue to accumulate in the hands of larger players,” the report stated.

Encana has drilled nine wells in the Duvernay, has five producing wells and currently has two rigs actively drilling additional wells. With the formation of this joint venture, Encana expects to more than double its planned pace of development in the Duvernay play beginning early in 2013.

"Phoenix's investment demonstrates the tremendous value that Encana has created in this early life liquids rich play, and enables us to accelerate the pace at which the full production potential of our Duvernay lands can be achieved," said Randy Eresman, Encana president and chief executive. “A transaction of this magnitude keeps us on track to create a more diversified commodity portfolio and maintain our balance sheet strength. It is a strong endorsement of Encana's position as a reliable long-term partner."

The joint venture taps the unique strengths of each partner and will allow PetroChina to lower its overall risk profile, said Zhiming Li, Phoenix's president and chief executive. "The Duvernay project will combine Phoenix's integrated upstream and downstream capabilities and financial resources with Encana's proven resource play hub expertise. This joint venture will build a foundation for the successful development of the Duvernay play and help to diversify our business portfolio.”

Encana has formed several joint venture transactions in 2012, and this type of arrangement has become an important part of its business model. Its management believes the joint ventures help the company to deploy capital more efficiently across its development base and to diversify its portfolio of commodities.

Encana also thinks these joint ventures may increase natural gas demand as a number of its partners are actively exploring opportunities to export liquefied natural gas (LNG), while some are industrial consumers looking to transition to natural gas as fuel for their operations. An example is a recent agreement with Nucor Energy Holdings (Nucor), which is designed to support Nucor's increased use of natural gas for its facilities – including its direct reduced iron facility currently under construction in Convent, La.

RBC Capital Markets acted as financial advisor and Burnet, Duckworth & Palmer LLP acted as legal advisor to Encana for this transaction. Calgary-based Encana is an upstream oil and gas producer.