Monday, February 14, 2011

The Chinese juggernaut rolls on North America

Encana Corp has established a joint venture with PetroChina through the sale of 50% interest in its Cutbank Ridge business assets for C$5.4 billion. The business assets in this planned JV include the majority of Encana’s Montney, Cadomin and other natural gas assets on a portion of its British Columbia and Alberta lands. The properties involved in the transaction include current daily net production of about 255 MMcfe/d, proved reserves after royalties of about 1 Tcfe, as at the end of 2010, and about 635,000 net acres (1.3 million gross acres) of land straddling the British Columbia and Alberta boundary. The planned JV infrastructure, on a 100% basis, includes about 700 MMcf/d of processing capacity, about 3,400 kms of pipelines and the Hythe natural gas storage facility.

Analyst’s comments:
The oil & gas industry believes that one of the reasons for the Canadian dollar boost is that Encana’s 50/50 JV with PetroChina for C$5.4 billion. "Where we are positioned relative to other currencies ... is largely reflecting foreign investment news overnight," said David Watt, senior currency strategist at RBC Capital Markets, financial advisor to Encana with respect to this JV.

Following the announcement of this JV, Encana’s shares have surged C$1.37 to C$32.02 on the Toronto Stock Exchange. "If it wasn't for this joint venture, the stock would be down, that's for sure," Canaccord Genuity analyst Phil Skolnick said. He added, "It's big and it's positive." PetroChina is paying about 20% more than the US benchmark gas price, analyst Gordon Kwan estimates.
Alan Boras, EnCana’s vice-president of media relations said the Cutbank Ridge field, has “tremendous potential, but given natural gas prices and the cash flow we’re able to generate, we can develop that at a certain pace. “We want to accelerate that pace because we believe that is the best way to bring additional value to Cutbank Ridge.” 
Encana established the sizable position in Cutbank Ridge in 2003, acquiring the majority of its land at an average cost of about C$700 per acre. However, the transaction values the land now at ~C$4,900 per acre.
Why are Chinese stepping into Canada???
Chinese companies are hunting for reserves worldwide in a quest to triple gas use in the growing economy in the next decade. To that end, the Encana deal could bolster efforts to establish a North American liquefied natural gas export industry.
Petrochina’s activities in Canada for the past 4 years include:

Chinese companies were active acquiring assets in Africa and South America in 2009 and 2010, respectively. In the last three months, CNOOC announced back-to-back JVs with Chesapeake for Eagle Ford/Niobrara shale plays. In 2011, are they trying to knock the North American doors????

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