Market Overview

EnCana and Mitsubishi in $2.8 Billion Shale Deal

Canadian natural gas provider EnCana (NYSE: ECA) announced on Friday that it had formed a partnership with Mitsubishi, with the Japanese conglomerate investing $2.9 billion. EnCana, for its part, has sold a 40 percent stake in its holdings at Cutbank Ridge in British Columbia to Mitsubishi.

Cutbank Ridge, where EnCana owns approximately 409,000 net acres, is one of the company's more prominent shale gas assets. According to the New York Times, Cutbank Ridge has reserves of approximately 900 billion cubic feet of natural gas equivalent.

Shale formations are in demand by deal-makers right now, even though controversy continues to surround them. The sedimentary rock from which natural gas and oil can be extracted by the process of fracturing, or fracking, has ecologists around the global up in arms, but the shale formations are still attracting foreign companies eager to invest in the North American assets.

This deal follows hot on the heels of the deal last month, when French oil company Total (NYSE: TOT) agreed to buy a piece of Chesapeake Energy's (NYSE: CHK) shale operation on Ohio for $2.32 billion. In addition, Sinopec International Petroleum Exploration and Production revealed plans to buy a 30 percent stake in five Devon Energy shale operations for $2.2 billion.

So the deal between EnCana and Mitsubishi is just the latest in what will probably be a long line, as fracking becomes increasingly popular. Mitsubishi will pay $1.45 billion when the deal closes, and will invest the remainder over a period of five years. “This is a landmark investment by an exceptional and global integrated business partner, Randy Eresman, Encana's chief executive, said in a statement. “The alignment we've already established with Mitsubishi will greatly enhance our plans to maintain Cutbank Ridge's leadership position among the most cost competitive resource plays on the continent.” In its Friday research report, Bank of America Merrill Lynch said that ECA remains operator of the partnership, which includes 409k net gross acres in BC (Montney, Cadomin, Doig) and 9.5 tcfe of 2P+2C resource (1.4 tcfe proved and 8.1 tcfe 2C). “ECA plans to direct more than 50% of its 2012 capital budget towards liquids development. The company has announced Tuscaloosa Marine Shale (two wells, IP's of 330 bpd and 700 bpd), Collingwood (three wells with up to 90bbls/mcf NGL's), DJ Basin Niobrara (five wells, IP rates 260-540 bpd of oil plus NGL's), Eaglebine (first well IP, 230 bpd of oil), and Duvernay. Liquids production is encouraging but will not have a meaningful impact until 2014 at the earliest.”

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