Encana, Canada's largest natural gas producer, has entered a deal with Freeport-McMoRan Oil & Gas to purchase Eagle Ford shale assets for $3.1 billion.
The buy was spurred by Encana's strategy to reduce its dependence on natural gas and refocus on fields with reserves high in oil and natural gas liquids.
The acreage sits in Karnes, Wilson and Atascosa counties in south Texas and has an estimated drilling inventory of more than 400 locations. The 45,500 net acres hold estimated net proved reserves totaling 59 million barrels of oil equivalents (boe) and estimated net proved and probable reserves of 69 MMboe at year-end 2013. Production from the field averaged 53,000 boe/d in the first quarter of 2014.
"Gaining a position in a world class, oil-rich resource play like the Eagle Ford accelerates the transition of our portfolio and underscores our investment focus on high margin assets," says Doug Suttles, Encana president and CEO.
In Canada, the company is focused on the Montney in British Columbia and the Duvernay in Alberta. In the US, the company is looking to accelerate efforts in the DJ Basin in Colorado, the San Juan Basin, and the Tuscaloosa Marine Shale.
Now, with anticipated proceeds from its recent Jonah sale and other transactions, as well as cash on hand, Encana seems well positioned to fund the transaction into its sixth growth area.
In the first quarter of 2014 production from the acquired acreage included approximately 46,000 bbls/d of total liquids production and 44 MMcf/d of natural gas, generating operating cash flow of US$327 million, with about 75% of the total production volumes for the period being oil.
"The deal metrics look accretive on production/cash flow," noted Global Hunter Securities analysts following the announcement; "however, we await management commentary to understand the growth profile (plateau production) and running room with +400 gross future locations."
Encana expects the assets to be free cash flow positive in 2014, allowing it to execute its existing capital plan for 2014 without redirecting capital from its other five core growth plays. Earlier in the year, the company noted plans to allocate roughly 75% of the $2.4-$2.5 billion 2014 CAPEX to the growth plays. As for the Eagle Ford acreage, Encana plans to have at least four drilling rigs running by the end of the year.
For its part, Freeport-McMoRan Oil & Gas is viewing the deal as a way to refocus its asset base. After half of the estimated $2.5 billion in after tax net proceeds is used to repay outstanding indebtedness, the balance will be used for deepwater Gulf of Mexico investments.
The transaction is expected to close by the end of 2Q14. Scotia Waterous advised Encana and Barclays Capital Inc. provided financial advisory services to FM O&G.
