Encana Corp. (ECA), the Canadian energy producer seeking to boost investor returns by shifting toward crude, is doubling its oil output with a $3.1 billion purchase of shale lands from Freeport-McMoRan Copper & Gold Inc. (FCX)
The agreement to buy 45,500 net acres (18,413 hectares) in Texas’s oil-rich Eagle Ford basin from Freeport’s energy unit gives Encana “the opportunity to accelerate the rebalancing of our portfolio” to higher-priced crude, Encana Chief Executive Officer Doug Suttles said today on a conference call.
Suttles is lifting crude production to cut Encana’s reliance on natural gas after modern drilling technologies unlocked vast supplies of the heating and power-plant fuel from shale in North America and pushed prices below historical averages. Freeport said the proceeds would be used to cut debt and further invest in the deepwater Gulf of Mexico.
“The near-term metrics are fantastic,” Greg Dean, a portfolio manager at CI Investments Inc. in Toronto who holds Encana shares, said today in a phone interview, adding the producer is paying less relative to cash flow than recent Eagle Ford deals. “It’s a great transition asset.”
Encana rose 4.6 percent to C$25.69 at the close in Toronto, the most since March 2013. Freeport increased 0.4 percent to $33.99.
The assets, located in the Karnes, Wilson and Atascosa counties of South Texas, produced the equivalent of about 53,000 barrels of oil a day in the first quarter, Encana said. The company will increase the rig count to four from three by the end of the year on the lands and foresees drilling 400 more wells in the next three to five years, Suttles said on the call.
The deal is “positive at first blush,” with Encana paying about $14,000 per acre, or 2.4 times the first-quarter cash flow from the properties, Matthew Portillo, an analyst at Tudor Pickering & Co. in Houston, said in a note.
Dean said Encana may be seeking more oil properties with better production growth prospects than the Eagle Ford lands, adding “people should be cautious in assuming this is an asset they can meaningfully grow.”
Suttles, who became CEO of Calgary-based Encana in June, promised last year to prune assets and jobs, focusing on five areas that yield oil and natural gas liquids. The Eagle Ford will become a sixth area of focus, Suttles said.
The properties produce mostly oil at Light Louisiana Sweet prices, which trade at a premium to the West Texas Intermediate benchmark, Suttles said. The company may expand in the Eagle Ford formation and other areas of focus with purchases except the Tuscaloosa Marine Shale area, which spreads across Mississippi and Louisiana, he said.
Freeport, the largest publicly traded copper producer, is seeking to reduce debt that jumped almost sixfold last year to more than $20 billion following its acquisitions of two oil and natural gas companies. About half the proceeds from the Encana sale will be used to repay debt and the rest will be reinvested in its energy business, the Phoenix-based miner said today in a statement.
“The high-margin, oil-rich Eagle Ford was a key part of” Freeport’s energy business, Robson said. “Selling a key asset to allow for debt reductions and help fund capex sends very mixed signals to investors.”
The acquisition is expected to close by the end of the second quarter and will be funded with cash, including from asset sales closing this quarter. The deal won’t affect Encana’s spending plans in other areas because the properties will produce cash flow immediately, Suttles said.
Encana this year has agreed to sell about $2.3 billion of gas properties, including its Jonah field in Wyoming and lands in East Texas, and is marketing its 480,000-acre Bighorn fields in Alberta, people familiar with the process said in February. Encana also plans to sell shares in a royalty unit as early as this month.
Encana’s production was 87 percent gas in the fourth quarter, according to data compiled by Bloomberg. The company reports first-quarter earnings on May 13.
The purchase is “credit positive” for Encana because it will be funded in cash and adds more liquids to Encana’s portfolio, Matthew Kolodzie, a credit analyst at Royal Bank of Canada in Toronto, said in a note.
The company’s shares have gained 34 percent this year, valuing the company at C$19 billion ($17.4 billion).
Scotia Waterous, a unit of Bank of Nova Scotia, advised Encana on the transaction, while Freeport was advised by Barclays Plc.
(An earlier version of this story corrected the spelling of Mississippi.)
To contact the reporter on this story: Rebecca Penty in Calgary at email@example.com