CALGARY — Encana Corp. is selling a chunk of its undeveloped British Columbia natural gas lands to a Japanese player for $2.9 billion in a move aimed at shoring up the company’s balance sheet in the face of stubbornly low natural gas prices.
The announcement, on the same day the Calgary-based natural gas giant (TSX:ECA) posted an almost $250-million fourth-quarter loss on a big one-time charge, will see Mitsubishi Corp. take a 40 per cent interest in the Cutbank Ridge Partnership.
“We believe that the partnership we announced this morning with Mitsubishi crystallizes the value we identified at Cutbank Ridge over a decade ago, and further validates our strategy of building value from the ground up,” Encana CEO Randy Eresman told a conference call Friday to discuss the company’s latest financial results.
“This partnership provides an excellent analog for what we expect to achieve for several other plays throughout our portfolio. We continue to advance potential joint ventures in a number of other areas, both in Canada and in the United States.”
In a statement, Jun Yanai, CEO of Mitsubishi’s Energy Business Group, said: “Mitsubishi looks forward to tapping new natural gas supplies for the long-term development and eventual delivery to world markets.”
Since it spun off its oil assets into Cenovus Energy Inc. (TSX:CVE) more than two years ago, Encana has been focused almost exclusively on developing natural gas. Its pure-play status has made the current period of dismally low natural gas prices particularly challenging.
Encana had been banking on a $5.4-billion cash infusion from a joint-venture deal with PetroChina centred around assets in northeastern B.C. and Alberta. But that deal fell through last June when the two companies couldn’t see eye-to-eye on an operating agreement.
Encana had since been looking for another partnership for its undeveloped Cutbank Ridge lands, which came to fruition through Friday’s deal.
Encana shares fell 10 cents to $20.05 in afternoon trading on the Toronto Stock Exchange, after rising as much as five per cent earlier in the session.
The partnership with Mitsubishi includes about 409,000 net acres of Encana’s undeveloped Montney-formation natural gas lands in northeastern B.C. with proved undeveloped reserves of approximately 900 billion cubic feet of natural gas equivalent.
Mitsubishi, an integrated Japanese global business enterprise, is to pay $1.45 billion on closing, which is expected to occur later this month.
Encana said Mitsubishi will then invest a further $1.45 billion over the next five years, something that will reduce Encana’s capital investment commitment over the period to about 30 per cent of the total.
“In a normal price environment, this transaction would have accelerated Encana’s overall pace of development as a result of the increased capital spending profile on these assets,” said Eresman.
“However, in this lower natural gas price environment, we plan to more than offset the transaction’s near-term impact on near-term north American natural gas production oversupply by reducing spending and production across our entire natural gas portfolio.”
Encana plans to spend $2.9 billion this year, a decrease of about 37 per cent from 2011 levels. Of that, about $1.5 billion will be directed toward more lucrative oil and natural gas liquids-rich plays, Eresman said.
Through a combination of lower capital spending and production shut-ins, Encana said it aims to take some 600 million cubic feet per day of natural gas out of the market in 2012.
“As we look to 2012, it’s abundantly clear that continued reduction in natural gas drilling activity will be required to restore market balance,” said Eresman.
“We continue to believe that the long-term future for natural gas remains promising. However until we see signs of a sustainable recovery in prices we will be reducing our pace of natural gas development and restricting production from some of our natural gas wells to preserve value.”
In its earnings report, Encana cited an impairment charge of $854 million in reporting a net loss for $246 million or 33 cents per share, compared with a loss of $469 million or 64 cents per share in the same quarter a year ago despite lower 2010 impairment charges of $371 million.
Revenues, net of royalties, totalled $2.46 billion for the three months ended Dec. 31, up from $1.43 billion in the same year-year period.
Meanwhile, the company posted an operating profit of $46 million or six cents per share, down from $50 million, or seven cents per share in the year-ago period. Cash flow for the quarter was $946 million, up from $917 million.
Analysts polled by Thomson Reuters were on average expecting Encana to earn 13 cents per share on revenues of $1.74 billion.
For the full year, the company reported net earnings of $128 million or 17 cents per share on revenues of $8.46 billion, compared with net earnings of $1.17 billion or $1.58 per share on revenues of $8.87 billion.