Encana Leads Big Spenders Becoming Stressed Sellers in Oil Rout

  • Louisiana land sale was North America's largest in 2015
  • More sales seen by high-debt producers with banks pressuring

The energy industry’s biggest acquirers when the oil market was hot are turning into pressured sellers in the worst crude slump since the 1980s.

Encana Corp., after making about $9.9 billion of oil and natural gas purchases in 2014, announced North America’s most sizable energy land sale this year, with a deal Tuesday to unload its Louisiana assets for $850 million to lower debt. Repsol SA, Whiting Petroleum Corp., Surge Energy Inc. and Linn Energy LLC, all active acquirers on the continent last year, are also among sellers in 2015.

The tables have turned for acquisitive producers now grappling with climbing debt loads as oil prices that are hovering near a six-year low curb cash flow. While selling producing properties allows executives to reduce leverage, it comes at the expense of output and revenue.

“These are almost forced transactions,” said Sonny Mottahed, managing partner and chief executive officer of Black Spruce Merchant Capital Corp., a Calgary-based bank. Some big spenders borrowed money to do deals, and lenders are now calling for reduced leverage with the bleak outlook for oil, he said. “It’s getting more pressing the more time goes by.’’

Crown Jewels

Deals done to reduce debt are different than the normal reorganization of lands that companies undertake in good times and some are already being forced to part with “crown jewel” assets to keep creditors at bay, Mottahed said.

The sales by some of last year’s buyers are notable given oil and gas deals by producers have plunged with the crude crash, amounting to just $12 billion for North America in the first half of the year. That’s a drop of 78 percent from the same period in 2014 and the lowest start to a year since the first half of 2009, according to data compiled by Bloomberg.

Encana, the largest buyer of North American energy assets in 2014 after Repsol, avoided selling any of its flagship oil properties by parting with land in the Haynesville shale area that produces gas, which the Calgary-based company is shifting away from.

Debt Levels

Analysts had expected sales with Encana’s debt levels exceeding peers. The deal is poised to lower the company’s net debt to 3.2 times cash flow in 2016, from a previous estimate of 3.7, according to BMO Nesbitt Burns. That compares with an average multiple of 2.5 for rivals next year.

The Louisiana sale was “a clear win for Encana” and should give investors confidence it could also sell its Piceance, Denver Julesburg and San Juan properties in the U.S., Randy Ollenberger, an analyst at BMO in Calgary, wrote Tuesday in a note. The stock gained 3.5 percent the day of the announcement.

Encana has plunged 48 percent this year, almost double the 24 percent drop for the Standard & Poor’s/TSX Energy Index.

The company doesn’t need to sell assets to act on its strategy, Jay Averill, a spokesman, said by e-mail. Encana bought about as much as it sold in 2014 without adding significant leverage, and selling more to pay down debt now is prudent, he said.

Repsol Deals

Repsol, which spent $13 billion acquiring Canadian producer Talisman Energy Inc. in 2014, is also considering divesting assets in Venezuela, Alaska, Bolivia and the Gulf of Mexico to lower debt, people familiar with the plan said in July.

The Spanish company said it would sell $1 billion of non-oil assets when it announced the Talisman acquisition last December, Kristian Rix, a spokesman, said in a phone interview. He declined to provide further details on potential deals.

Whiting, Surge and Linn have together announced about $900 million of asset sales in 2015.

Trigger Sales

Companies with high debt may trigger more asset sales if oil prices don’t improve, Ajay Khurana, co-head of energy investment banking for the Americas at Jefferies LLC, said in a phone interview.

“You can see companies capitulate and say, ‘I need to sell assets in this
environment to reduce leverage,’” Khurana said. “If the market stays where it is and the commercial banks are more punitive than people hope, you could see more transactions occur.’’

Baytex Energy Corp. may sell assets to reduce its debt load after a big acquisition last year, Mottahed said. The Canadian crude producer spent
about $1.7 billion in cash and took on debt to acquire Aurora Oil & Gas Ltd.

Baytex has no plans for additional divestitures after selling assets last year in North Dakota, Wyoming, Saskatchewan and British Columbia following the Aurora purchase, Brian Ector, a company spokesman, said in an e-mail. The company believes that the suspension of its dividend, reduction of the 2015 budget and moves to reduce costs, all announced last week, are enough to get it through the price rout, Ector said.

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