Encana finds shale gas partner in Mitsubishi

Fri Feb 17, 2012 3:09pm EST
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CALGARY, Alberta (Reuters) - Encana Corp (ECA.TO: Quote) will sell a 40 percent stake in British Columbia gas assets to Japan's Mitsubishi Corp (8058.T: Quote) in a C$2.9 billion ($2.9 billion) deal that will help the Canadian company shore up a balance sheet battered by weak gas prices.

The agreement to sell Mitsubishi a stake in the massive Cutbank Ridge field in the Western Canadian province, coming as Encana announced an 8 percent drop in fourth quarter operating profit, is the latest in a string of asset sales by the Calgary-based energy producer.

For Encana, Mitsubishi effectively replaces PetroChina (601857.SS: Quote) as the deep-pocketed Asian partner it has long sought. A more ambitious C$5.4 billlion joint-venture agreement between Canada's No. 1 gas producer and the state-controlled Chinese company collapsed last June when the two sides broke off talks over final terms.

"(The Mitsubishi deal) provides them some wiggle room for 2012 and into 2013," said Chris Feltin, an analyst at Macquarie Capital Markets. "It shores up the balance sheet and provides some visibility on the sustainability of the dividend... I wouldn't mind seeing more asset sales or (joint ventures) but overall now Encana is in much better shape."

Encana also said it is looking for deep-pocketed partners for some other holdings, and wants to plow money into developing high-value liquids-rich assets such its undeveloped Tuscaloosa Marine shale deposit in Louisiana. In addition, it said it will cut its output of low-value dry gas by about 15 percent this year as it holds out for higher natural gas prices.

Encana and its rivals are struggling to cope with weak gas prices, which are hovering near decade lows, as a mild winter throughout North America cuts into demand, while production rises. The weakness in gas prices is driving oil and gas companies to focus on liquids-rich deposits.

Mitsubishi has agreed to pay C$1.45 billion for the stake in Cutbank Ridge in a deal that will close later this month. The Japanese trading house will also invest a further C$1.45 billion in the project over five years, in addition to its 40 percent share of the project's future capital investment.

"The investment by Mitsubishi reflects the value of a well-delineated world class resource play that is being developed in a highly efficient manner," Randy Eresman, Encana's chief executive, said on a conference call. "This partnership provides an excellent analog for what we expect to achieve in several other plays throughout our portfolio."

The assets in the partnership will include 409,000 net acres of undeveloped Montney lands in British Columbia, in addition to development potential in the Cadomin and Doig formations. Encana will serve as managing partner and operator of the partnership.   Continued...