Tuesday, April 3, 2012

Encana in Play?

Yesterday, Encana Corp. announced that the company was seeking joint venture partners to develop its liquids acreage, including 1.2 million net acres  in four fields in the U.S. (including the Tuscaloosa Marine Shale) and 375,000 net acres in one field in Canada.  Today, Bloomberg reports that Malaysian national oil company Petronas is looking at a possible Canadian acquisition after an interview with the company's CEO. Analysts immediately pointed to Encana and to a lesser extent Talisman as potential targets.  It probably doesn't help the rumor mill that Encana CEO Randy Eresman was in Singapore, a stone's throw from Petronas' HQ in Kuala Lumpur, delivering a presentation a day before Bloomberg interviewed the Petronas CEO.

While Encana is touting its oil and NGL properties, Petronas likely is more interested in its natural gas holdings and its 30% interest in the planned Kitimat LNG export facility in western British Columbia. With a long-term view and the backing of the Malaysian government, Encana probably looks very tasty. It doesn't hurt that natural gas is trading at obscenely low prices in North America and Encana is undervalued relative to other producers. I think the interest in the Kitimat facility is especially attractive to the Malaysian company, as it is farthest along in the Canadian approval process (see green dot on map below; first exports expected Q4 2015 or Q1 2016) and is one of the few LNG export facilities likely to be approved on the west coast.

Encana was created a couple of years ago when the original Encana parent split into an integrated oil company Cenovus Energy, Inc. and pure play natural gas company Encana Corp.  It was sold to investors at the time as an opportunity for the more nimble gas company to take off running.  But low gas prices thwarted the story and Encana had to scramble madly for oil and liquids to maintain cash flow and please analysts.  So far, the company has survived on hedging (WSJ reports two-thirds of 2012 production hedged at $5.80/MMcf, but much less protected in 2013).

If Encana is in fact the acquisition target, the biggest obstacle might be the Canadian government, which (in)famously blocked the BHP Billiton acquisition of Potash a couple of years ago. I know zip about Canadian politics, but Encana is a big fish up north, so any acquisition of the company would be heavily scrutinized.

Buuuuuuut, this might just be a case of reporters and analysts jumping to conclusions and Petronas may only be interested in a big natural gas joint venture with a Canadian company.  Stay tuned...

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