Encana to Form JV with CNPC - Analyst Blog

Canada’s premier natural gas producer Encana Corporation (ECA) and state-controlled China National Petroleum Corporation, also known as CNPC, agreed to form a potential joint venture to develop the Canadian company's shale-gas properties in northern British Columbia. The two companies signed a memorandum of understanding, formally referred to as Heads of Agreement in Ottawa.

In northern British Columbia, Encana holds about 275,000 net acres of land in the Greater Sierra play covering the Devonian shale formation in its Horn River play and about 1.7 million net acres covering the Jean Marie formation. The company’s Montney holdings at Cutbank Ridge total almost 720,000 net acres. 

Under the terms of the agreement, Encana would act as the operator for the joint venture by handling the drilling and completion of the wells, building the processing facilities and pipelines and conducting all field works. CNPC, on the other hand, would invest capital to earn an interest in the assets and provide technical expertise.

The final agreement, being subject to certain specific conditions and regulatory approvals, will take several months to materialize.

Over the last three years, Encana has gained almost $4 billion (approximately $900 million is planned to be invested in 2010) of capital through multiple joint venture agreements in Canada and the United States. Currently, the company is targeting annual joint-venture investments between $1 billion and $2 billion, and the deal, if successful, will contribute significantly toward achieving the investment target.

This is the second joint venture on the part of Encana with an Asian petroleum company, following the collaboration with Korea Gas Corporation (worth $1.1 over the next five years) to develop natural gas fields in northeastern British Columbia in February.

Over the next five years, Encana anticipates that its production will double, considering an impressive unconventional natural gas resource portfolio and an accelerating organic growth rate. Management is of the opinion that internally-funded capital investments along with an extensive joint-venture program will augment Encana’s North American resource portfolio’s value.

Upon successful completion of the transaction with CNPC, Encana will benefit from lower costs, reduced risks, increased capital efficiencies, improved project returns and technologically-updated production techniques.

Encana is currently rated as a Zacks #3 Rank (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one-to-three months. Moreover, the company’s large inventory of gas resource properties and management’s capability to successfully utilize the resources for production will only help the stock to keep pace with its peers over the next six-to-twelve months, supporting our Neutral recommendation.
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