Encana in Play as Petronas Seeks Natural Gas

Malaysia’s bid to secure natural gas supplies in Canada is turning Encana Corp. and Talisman Energy Inc. into two of the industry’s cheapest targets.

Petroliam Nasional Bhd., the state-owned oil company known as Petronas, is studying a Canadian acquisition of more than $5 billion, Chief Executive Officer Shamsul Azhar Abbas said in an interview last week with Bloomberg News. Encana is searching for partners to fund drilling and is worth just $1.50 per thousand cubic feet of gas reserves, the least among producers in Canada, according to data compiled by Bloomberg. Encana and Talisman, which is spending less on extracting natural gas after prices fell to a 10-year low, are also the two cheapest versus output.

Petronas joins Asian companies such as PetroChina Co., Mitsubishi Corp. and Cnooc Ltd. in seeking production in North America, where a boom in shale-gas exploration lowered natural-gas prices to less than 15 percent of benchmark prices in Asia. Encana, Canada’s biggest natural-gas producer, and Talisman, which has assets in British Columbia and Pennsylvania, as well as gas fields off the coasts of Malaysia and Indonesia, may make sense for Petronas, First Asset Investment Management Inc. said.

For Asian buyers such as Petronas, “it’s really about access to resources,” John Stephenson, who helps manage $2.7 billion at First Asset Investment in Toronto, said in a telephone interview. “They’re locking in long-term reserves to feed a growing economy, so it’s both a political and strategic imperative. Even adding in the cost of shipping, you’d be making a ton of money” importing from North America, he said.

‘Willing to Talk’

Carol Howes, a spokeswoman for Encana, and Talisman’s David Mann, declined to comment on whether their companies have been approached by Petronas about an acquisition. Both energy producers are based in Calgary.

First Asset’s Stephenson said in addition to Encana and Talisman, Progress Energy Resources Corp. could also be a likely target if Petronas decided to pursue a smaller deal. In August, Petronas bought a 50 percent stake in three natural-gas fields in British Columbia from Calgary-based Progress Energy. Its stock jumped 7.9 percent yesterday.

“Our talks with Petronas have been strictly related to our joint-venture activities,” Progress Energy CEO Michael R. Culbert said in a telephone interview.

When asked whether the company would consider talks with Petronas about a takeover, he said “if it maximizes shareholder value then we’re always willing to talk to anybody.”

Azman Ibrahim, a spokesman at Petronas, declined to comment on whether it had approached Encana, Talisman or Progress Energy about an acquisition.

Going Big

A purchase of more than $5 billion would be twice as large as any deal that Petronas has ever completed. In 2008, Petronas agreed to pay $2 billion for a 40 percent stake in Santos Ltd.’s Gladstone LNG project in Australia.

“This is going to be big,” 59-year-old Shamsul, said in a March 30 interview on the 81st floor of the company’s twin towers headquarters in Kuala Lumpur. “There are quite a few candidates out there, who are willing to talk.”

He said a deal may be announced within three months.

Petronas has embarked on a worldwide review of its energy assets since Shamsul took over as CEO in February 2010 and plans to spend a record 300 billion ringgit ($98 billion) over five years to help replenish Malaysia’s diminishing reserves and secure supplies that can be guaranteed over time.

The company’s total oil and gas production globally has declined for two consecutive years, decreasing to 2.14 million barrels of oil equivalent per day in its fiscal year ended March 2011, according to its annual report.

Natural Gas Appeal

Petronas is now eyeing energy producers in Canada as the development of so-called hydraulic fracturing to extract gas trapped in shale rock has caused the price of natural gas in North America to plummet, even as Asian import prices surge.

Gas fell to $2.13 per million British thermal units last week on the New York Mercantile Exchange, the lowest since February 2002. The price of liquefied natural-gas imports from the U.S. to Japan was $16.76 per million British thermal units as of Jan. 31, more than doubling in the past five years, according to the most recent data.

Encana’s assets could appeal to Petronas because the company is cheap relative to reserves and also has a significant amount of land, according to Robert Lutts, who oversees about $500 million as president of Cabot Money Management Inc. in Salem, Massachusetts.

The company, which has a market value of $14.5 billion, is worth about $1.50 for every thousand cubic feet of natural gas in its reserves, according to data compiled by Bloomberg.

Relative Value

That’s about half as much as the average for independent oil and gas producer in North America and the cheapest of any one in Canada with at least $1 billion in market value.

Encana also had almost 12 million net acres of land across North America, more than twice the size of New Jersey, Executive Vice President Eric Marsh said at a Feb. 7 conference.

“The number-one reason it would be attractive is because they have significant natural-gas assets,” Lutts said in a telephone interview. “And of course, natural-gas pricing where Petronas is from has substantially higher costs, so it could be a potential fit to their needs. Given the values that it’s trading at, it is a candidate to be acquired.”

Encana said yesterday that it is looking to sell minority stakes to help fund drilling on 1.58 million acres of oil and gas-liquids fields in the U.S. and Canada.

The company, which fell 41 percent in the past year, is selling assets, scaling back natural-gas production and entering into partnerships to help cover costs as a drop in gas prices helped cause earnings to fall short of estimates in five of the past seven quarters, data compiled by Bloomberg show.

‘800-Pound Gorilla’

“They’re the 800-pound gorilla in Canada,” Sam La Bell, energy and special situations analyst at Veritas Investment Research Corp. in Toronto, said in a telephone interview. “There are all sorts of other gas players who are in trouble, but they don’t have the scale to be a target.”

Talisman’s assets could be attractive in a joint venture for Petronas because of its shale properties in British Columbia, where producers plan to build facilities to ship liquefied natural gas to Asia, said Philip Skolnick, an analyst with Canaccord Genuity Inc.

The company holds 144,000 net acres in the Montney Shale natural-gas field in northeastern British Columbia, as well as 217,000 net acres in Pennsylvania’s Marcellus Shale formation, according to its website.

Most international companies “would want to get involved with or buy a company where there was a good prospect for moving gas to the coast,” said Michael Tims, chairman of Peters & Co., a Calgary-based investment bank.

Opportunity Cost

“Regionally, that means they would look for players in northeast British Columbia” he said, without identifying any potential candidates.

Talisman, which also has fields in Malaysia that accounted for 30 percent of its production in southeast Asia and Indonesian offshore interests, is valued at about $6 for every cubic foot of natural gas it produced per day, according to data compiled by Bloomberg. That’s cheaper than any Canadian oil and gas company, apart from Encana, the data show.

Any buyer would now have to convince potential targets such as Encana to sell before a projected rebound in natural-gas prices from a 10-year low. Gas futures may average $3.59 in 2013, analysts’ estimates compiled by Bloomberg show. That’s almost 70 percent higher than yesterday’s price.

PetroChina, Asia’s largest energy producer, last year walked away from an agreement to pay C$5.4 billion ($5.4 billion) for a 50 percent stake in Encana’s Cutbank Ridge joint venture and fund development of about 635,000 net acres in British Columbia and Alberta after failing to agree on price.

National Interest

The deal would have been the Beijing-based company’s biggest overseas acquisition. Encana later agreed to sell a 40 percent stake in Cutbank Ridge to Mitsubishi for C$1.45 billion upfront and a commitment on funding development over five years.

Any acquisition also may need the approval of Canadian regulators. The government in November 2010 rejected Melbourne-based BHP Billiton Ltd.’s $40 billion hostile takeover of Saskatoon, Saskatchewan-based Potash Corp. of Saskatchewan after the province said the sale would cut jobs and tax revenue.

For Asian governments in need of energy assets to fuel their economic growth, state-owned companies such as Petronas will play an increasingly influential role in dealmaking, according to Christian O’Neill, an oil and gas analyst for Bloomberg Industries in Skillman, New Jersey.

Petronas accounted for about a third of the Malaysian government’s estimated 183 billion-ringgit revenue in 2011, according to the finance ministry.

“The thirst for natural gas over the long term is going to be significant” for Asian economies, O’Neill said. “Everyone in Asia is concerned that gas is going to be tight. There’s the belief that we’ve got a long-term supply of natural gas relative to our demand. What Petronas will be buying is exposure to the North American natural gas market.”

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