Encana, the largest natural gas producer based in Canada, expects to close a $2.9 billion sale of a 40% stake in its British Columbia gas assets to Japan's Mitsubishi later this month, Encana CEO Randy Eresman said Friday.
Eresman said in a conference call that the deal commits Mitsubishi to pay $1.45 billion at closing and the balance over the next five years during development of 409,000 acres of undeveloped land in the Cutbank Ridge play in British Columbia.
He said Encana will be operator and hold 60% of the newly-created Cutbank Ridge Partnership, with Mitsubishi's entry reducing Encana's capital funding commitments to 30% in the five-year period.
Eresman said production from the shale gas property would support the Apache-operated Kitimat LNG project, which has Canadian export permits for two trains totaling 1.4 Bcf/d, with the initial 700,000 Mcf/d due on stream in 2015.
None of the output would be fed into an over-supplied North American gas market, he said.
Eresman said a final investment decision on Kitimat is expected by mid-2012 on completion of a front-end engineering and design study and an agreement with a "significant" buyer of the LNG.
The purchase agreement could see the buyer take an equity position in the project, which is currently divided among Apache 40%, Encana 30% and EOG Resources 30%, and reduce Encana's equity interest by an unspecified amount, he said.
Eresman said there has already been a favorable ruling on the joint-venture from the Canadian government's foreign investment agency.
The deal comes a year after Encana announced a joint-venture with PetroChina that folded after Ottawa twice delayed approval of the transaction and Encana said there was a "significant misalignment" in business negotiations between the two companies.
The Calgary-based company said at the time it would restart the search for a partner to share the cost of developing stranded gas in northern British Columbia.
Eresman said the Mitsubishi investment "crystallizes value we identified over a decade ago" during pioneering exploration of the region's unconventional gas resources.
He said Encana is actively negotiating more Mitsubishi-type deals for Canada and the US, based on continued interest in the company's dry gas plays. This would also accelerate its liquids-rich gas plays which are being targeted at 80,000 b/d by 2015, up 56,000 b/d from current levels.
But low gas prices have forced Encana to shut an additional 250,000 Mcf/d of dry gas production this year, removing 600,000 Mcf/d of volumes from the market, reducing its original 2012 guidance of 3.1 Bcf/d and scaling back drilling of dry gas prospects through the year.
Eresman said his company's objective is to "live within our means" until prices recover, forecasting dry gas capital spending of $1.2 billion, partly to preserve value already identified by drilling results.
Mike McAllister, executive vice-president, said drilling of 375,000 net acres in the northern Alberta Duvernay shale is yielding "very encouraging" condensate and natural gas liquids results and the pace of evaluation will be accelerated in 2012.
He said early indications point to liquids output of 75 to 300 barrels for every 1,000 Mcf of gas.
The company said its Deep Panuke natural gas development offshore Nova Scotia is expected to deliver its first commercial gas by mid-year and ramp up to 200,000 Mcf/d to provide new supplies to the northeastern US.
Encana posted an operating profit for the fourth quarter of $46 million, or $0.06/share, after an impairment charge of $854 million, compared with $50 million, or $0.07/share, including an impairment charge of $371 million, a year earlier. Cash flow rose 6% to $976 million, and natural gas production was up 7% to 3.45 Bcf/d.
