Encana Corp. (ECA) said in the summer that it would rely on cash flow and proceeds from divestitures to make ends meet.
In August, the $850 million sale of its gassy Haynesville assets gave the company’s balance sheet an extra cushion to pay down debt. By October, Encana effectively began stashing money under the mattress.
Encana said Oct. 8 it had reached an agreement to sell its Denver-Julesburg (D-J) Basin assets for $900 million, further buttressing its balance sheet. Proceeds will be used to retire more debt. The company’s October investor presentation says the company owes $5.6 billion in net debt.
Encana will sell all of its D-J assets in Colorado to a new entity that is owned by the Canada Pension Plan Investment Board (95%) and Denver-based The Broe Group (5%).
With the sale, Encana will have generated cash proceeds of $2.7 billion through divestitures and reduced net debt by $3 billion. In April, the company’s $1.3 billion debt repayment saved the company $200 million in future interest expenses.
As of June, Encana’s debt maturities were spaced out from 2019 through 2041.
The D-J Basin sale continues Encana’s strategy of focusing nearly all of its capital on four asset bases and investing more in liquids: the Permian, Eagle Ford, Duvernay and Montney.
"Our efforts to transform our portfolio, improve efficiency and grow margins are increasing returns and strengthening our balance sheet, positioning Encana for success throughout the commodity cycle,” said Doug Suttles, president and CEO.
With a commitment to managing its debt load, challenges remain, said Paul Y. Cheng, Barclays Capital Inc. analyst, in September.
“The company is … relying on significant asset sale proceeds to fund cash flow and its $225 million dividend,” he said. “We wonder about the longer-term sustainability of this program.”
As the saying goes, so far, so good.
Tudor, Pickering, Holt & Co. (TPH) said the D-J assets’ $900 million price tag was roughly in line with its $1 billion valuation.
During the first half of 2015, Encana's D-J Basin assets produced an average of 52 million cubic feet per day (MMcf/d) of natural gas and 14,800 barrels per day (bbl/d) of crude oil and NGL.
Based on Encana's development plan at year-end 2014, its D-J Basin assets had estimated proved reserves of 96.8 million barrels of oil equivalent (MMboe), more than 40% natural gas.
TPH said Encana’s next likely divestiture candidate will be its holdings in the San Juan Basin, which the firm estimates is worth $400 million.
“Absolute net debt/EBITDA estimates may still look relatively high but we think raising cash and reducing debt should go a long way to help alleviate concerns around investment grade rating with the deal likely to reduce 2016 net debt/EBITDA by about 0.5x,” TPH said.
The deal looks accretive at 6-7x 2016 EBITDA compared to the company’s stock, which is trading at about 5x EV/EBITDA.
“We would continue adding shares as investors would receive the core Permian and Eagle Ford at a steep discount,” TPH said.
The sale is subject to normal closing conditions, regulatory approvals and post-closing and other adjustments. The transaction is expected to close in the fourth quarter of 2015, with an effective date of April 1, Encana said.
Contact the author, Darren Barbee, at dbarbee@hartenergy.com.
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