Calgary-based producer Encana has ended talks with PetroChina to form a joint venture focused on its Cutbank Ridge natural gas shale play, it said Tuesday, effectively pulling the plug on the largest such JV transaction in North America.
In February, Encana announced it would sell a 50% stake in its Cutbank Ridge assets in the western Canadian provinces of Alberta and British Columbia to PetroChina for C$5.4 billion ($5.4 billion). The assets produce around 255,000 Mcf/d of gas equivalent.
The deal included associated pipelines, storage and processing facilities with a view to possibly exporting the supplies to Asian markets. Encana has a 30% stake in the Kitimat LNG terminal in British Columbia.
"After close to a year of exclusive negotiations with PetroChina, we were unable to reach alignment on the planned transaction," Encana CEO Randy Eresman said Tuesday.
Analysts greeted the news with dismay and the Canadian company's stock price plummeted in higher-than-average volumes.
"Cooler heads finally prevailed," said IHS Herold analyst Michael Wang. "As they say in China, they were partners sleeping in the same bed, but dreaming different dreams."
PetroChina, Wang added, is looking for gas assets to potentially be exported to China in the form of LNG. Encana was looking to pay down debt. Also, the deal -- pegged at $17,000/acre, a valuation usually reserved for liquids plays such as the Eagle Ford -- was simply too expensive.
Wang noted the most recent Western Canadian deal between Malaysia's Petronas and Progress Energy Resources in the Montney formation pegged acreage at $14,000/acre.
"Someone higher up in the Chinese cabinet took one look at this deal, decided it was not prudent and ended it," Wang said.
"PetroChina walked away from the deal because they wanted to see growth and Encana wanted to hold their leases. They couldn't come to a compromise," a source close to the matter said.
Sources also said PetroChina was deeply disappointed Encana significantly scaled back its production targets through 2015.
The Canadian company had initially planned to grow production 14.4% year-on-year, but during its first-quarter earnings release in April, lowered that figure to 10% a year.
Barclays Capital analysts said the announcement is "negative for Encana in that it re-raises concerns around funding and growth."
"We believe [Encana] to be [about] $2 billion underfunded over the remainder of 2011 and 2012," the Barclays analysts added.
"We have determined that the best way for us to advance our plans to unlock value from our Cutbank Ridge business assets is to offer up a variety of joint venture opportunities for portions of the undeveloped resources, and, separately, to examine a transaction with respect to our midstream pipeline and processing assets in the area," Eresman said Tuesday.
Analysts, however, were skeptical Encana could sell the individual assets for the same $5.4 billion price tag PetroChina had offered.
"Economically speaking, a large position is much more marketable," said Morningstar analyst Rob Bellinski. "When you're selling each piece, you're dealing with more transaction fees and you're spending more time negotiating with various companies. It's more attractive to find one partner with deep enough pockets."
PetroChina, meanwhile, is aggressively focused on growing its worldwide supply portfolio.
The Chinese national oil company aims to produce 1.47 million barrels of oil equivalent, or half of its total output, from overseas projects by 2015, officials said earlier this year. It also plans to double the volume and value of its oil trading business compared with 2010, when it turned over 200 million mt and $100 billion.
A source close to PetroChina said the failed deal would not deter the company from making future investments in North American unconventional plays.
Encana, meanwhile, said aside from the Cutbank Ridge assets, it would continue to look for partners in its Horn River and Greater Sierra plays.
The company said Tuesday that discussions were "well underway on these potential transactions as well as a potential divestiture of producing assets in the northern portion of Greater Sierra."
It remained confident it would get between $1 billion and $2 billion this year from JV capital, which would exceed its net divestiture target of between $500 million and $1 billion for the year.
Encana's stock price plummeted some 70 cents on the news, but ultimately closed down 24 cents, or 0.8%, at $29.86/share as trading volumes were triple the monthly average.
