Calgary-based Encana Corporation (TSX: ECA) (NYSE: ECA) has entered into a joint venture arrangement with Phoenix Duvernay Gas, a wholly owned subsidiary of PetroChina, to explore and develop Encana’s extensive undeveloped Duvernay land holdings in west-central Alberta.
Under the terms of the agreement, Phoenix will gain a non-controlling 49.9% interest in Encana’s approximately 445,000 acres in the Duvernay play for total consideration of C$2.18 billion (about US$2.22 billion).
At closing C$1.18 billion (US$1.2 billion) was paid to Encana and C$1.0 billion (US$1.01 billion) is payable over the next four years in the form of a carry of half of Encana’s share of development capital. During this period, the joint venture partners plan to invest a total of C$4.0 billion (US$4.08 billion) in new drilling, completion, and processing facilities. Encana estimates that the Duvernay joint venture lands contain about 9 billion barrels of oil equivalent petroleum initially-in-place. Encana remains the operator of the joint venture with its 50.1% working interest.
“Phoenix’s investment demonstrates the tremendous value that Encana has created in this early life liquids rich play, and enables us to accelerate the pace at which the full production potential of our Duvernay lands can be achieved," says Randy Eresman, Encana president and CEO. “A transaction of this magnitude keeps us on track to create a more diversified commodity portfolio and maintain our balance sheet strength. It is a strong endorsement of Encana’s position as a reliable long-term partner.”
Encana has drilled nine wells into the Duvernay, has five producing wells and currently has two rigs actively drilling additional wells. With the formation of this joint venture, Encana expects to more than double its planned pace of development in the Duvernay play beginning early in 2013.
“The Duvernay project will combine Phoenix’s integrated upstream and downstream capabilities and financial resources with Encana's proven resource play hub expertise. This joint venture will build a foundation for the successful development of the Duvernay play and help to diversify our business portfolio. Encana is our ideal long-term partner for the development of our future natural gas business,” says Zhiming Li, Phoenix’s president and CEO.
Having entered into several joint venture transactions in 2012, these types of arrangements have become an important part of Encana’s business model. Joint ventures help the company to achieve a highly efficient deployment of capital throughout its vast exploration and development asset base as Encana transitions to a more diversified portfolio of commodities.
Encana says that these relationships have the potential to increase natural gas demand as a number of Encana’s partners are actively exploring opportunities to export liquefied natural gas (LNG), while some are industrial consumers looking to transition to natural gas as fuel for their operations. An example is a recent agreement with Nucor Energy Holdings (Nucor) which is designed to support Nucor’s increased use of natural gas for its facilities, such as its direct reduced iron facility currently under construction in Convent, Louisiana.