Mitsubishi Corp. (8058) agreed to pay C$1.45 billion ($1.46 billion) for a 40 percent stake in Encana Corp. (ECA)’s Cutbank Ridge, eight months after PetroChina Co. walked away from a deal for the natural-gas assets.
Mitsubishi will pay another C$1.45 billion for the next five years to fund costs at the Cutbank Ridge Partnership, which holds 409,000 net acres and an estimated 900 billion cubic feet of gas, Calgary-based Encana said in a statement today. The deal doesn’t include 600 million cubic feet a day of current production or gas processing and pipelines in the area.
Mitsubishi, based in Tokyo, steps in after PetroChina in June abandoned a C$5.4 billion agreement to take a 50 percent stake in a Cutbank Ridge joint venture and fund development of about 635,000 net acres in British Columbia and Alberta. That agreement included current production and existing assets.
Encana has “done a lot of looking at who fits best with them,” said Mike Tims, owner of about 200 Encana shares and chairman of Peters & Co., a Calgary-based investment bank. “The valuation they got was above our expectations. This looks like a logical fit and an attractive deal.”
Encana has been selling assets and bringing in partners to fund its drilling costs as gas prices declined. The company announced $3.5 billion in asset sales last year and sees investment of $1 billion to $2 billion annually by joint-venture partners, Executive Vice President Eric Marsh said at a Feb. 7 conference in Colorado.
The transaction is expected to close next week, Chief Executive Officer Randy Eresman said on a conference call.
“Encana plans to conserve most of the additional financial flexibility provided by this and previously announced transactions during this prolonged period of low natural-gas prices,” Eresman said in the statement. The company said it will cut spending elsewhere to reduce the transaction’s impact on North American gas “oversupply.”
Encana will cut as much as 600 million cubic feet of gas a day this year, about half from reduced spending and half from halting output, according to a separate release today. Gas prices hit a 10-year low in New York last month and averaged 55 percent lower last year than in 2008, when they reached a record high.
Gas prices have dropped as the increased use of hydraulic fracturing and horizontal drilling allowed for more production from shale-rock and tight-sands formations in the U.S. and Canada, including the Cutbank Ridge area.
The announcement was made after the close of regular trading on Japanese markets. Mitsubishi rose 2.6 percent to 1,879 yen in Tokyo. Encana fell 0.9 percent to C$19.97 at the close in Toronto.
RBC Capital Markets and Jefferies & Co. were Encana’s financial advisers and Burnet, Duckworth & Palmer LLP provided legal advice, according to the statement. Barclays Plc and Bennett Jones LLP advised Mitsubishi.
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