Calgary-based Encana Corporation (TSX, NYSE: ECA) has reached an agreement with Toyota Tsusho Wheatland Inc., a subsidiary of Toyota Tsusho Corporation, that will see the Japanese company invest approximately C$602 million (US$608 million) to acquire a 32.5% royalty interest in natural gas production from a portion of Encana’s coalbed methane (CBM) resource play. The agreement includes production from a total of about 5,500 existing wells and potential future drilling locations in southern Alberta province.
“This investment from a global partner recognizes the significant value identified in Encana's CBM lands which rank among the company’s lowest-cost, lowest-risk assets, and signifies another step as Encana pursues a range of opportunities to manage its portfolio and enhance the long-term value creation of its vast inventory,” said Randy Eresman, Encana president and CEO. “Encana’s CBM resources cover a great expanse that includes approximately 2.1 million net acres in the Horseshoe Canyon fairway. The vast majority of this acreage is fee lands, where Encana holds the mineral rights in perpetuity, and are estimated to contain significant amounts of recoverable natural gas. This relationship with Toyota Tsusho, a world-class leader, offers strong synergies that have the potential to foster expanded business opportunities. Further, this agreement serves as a model for other investment opportunities and supplies capital investment to preserve the value and efficient development of Encana’s shallow gas lands in Alberta that have contributed long-life production for more than five decades.”
Encana’s CBM assets integrate CBM and the company’s widespread shallow gas developments, including tapping into coal seams and sands using a combination of existing, new, and recompleted wells. Under the agreement, Toyota Tsusho paid C$100 million with the closing of the transaction yesterday and will invest approximately C$502 million over seven years to acquire a 32.5% royalty interest, before deductions, in production from about 4,000 existing wells and around 1,500 potential future drilling locations. These wells are located in an area covering about 480,000 net acres along the eastern edge of the Horseshoe Canyon fairway — an area that represents about 24% of Encana’s total CBM net acreage.
The existing wells on these lands are currently producing a total of about 120 million cubic feet equivalent per day of natural gas. The area contains approximately 480 billion cubic feet equivalent (bcfe) of proved plus probable reserves and 140 bcfe of best estimate economic contingent resources as of Dec. 31, 2011. Under the agreement, Encana will be operator and Encana and Toyota Tsusho have established a management committee that will provide overall supervision and direction of development operations.
Consistent with its established operating procedures and corporate responsibility practices, Encana said it is committed to demonstrating reliability and trustworthiness as it engages in safe, energy-efficient, sustainable development, and to advancing this development with consideration and respect for the people, communities, and environment where it operates.
Eresman noted, “Our integrated CBM wells produce low-pressure, sweet natural gas that is essentially pure methane, and as a result is a cleaner energy source, producing the fewest emissions of any hydrocarbon — a natural gas resource capable of delivering long-term, affordable energy supplies to domestic and export markets.”
Encana said that it is always looking for opportunities to optimize the development of its large inventory of assets and is advancing joint ventures, farm-out arrangements and partnership opportunities to unlock value in the company’s enormous reserve and resource base.
RBC Capital Markets and Jefferies & Company, Inc. are acting as financial advisors to Encana with respect to this transaction. Burnet, Duckworth & Palmer LLP is acting as legal advisor to Encana.
Encana is a large North American energy producer that is focused on growing its strong portfolio of diverse resource plays producing natural gas, oil and natural gas liquids.
Toyota Tsusho is a general trading company that develops business together with over 400 consolidated group companies in Japan and overseas around the world, via a global network covering Japan and more than 60 other countries worldwide. The company has a divisional system made up of seven divisions, namely the Metals Division, the Global Production Parts & Logistics Division, the Automotive Division, the Machinery, Energy & Project Division, the Chemicals & Electronics Division, the Produce & Foodstuffs Division, and the Consumer Products, Services & Materials Division.