Encana Oil & Gas (USA) Inc., a subsidiary of Encana Corp. (TSX: ECA) (NYSE: ECA), has agreed to sell its Haynesville natural gas assets, located in northern Louisiana, to GEP Haynesville LLC (GeoSouthern), a joint venture formed by GeoSouthern Haynesville LP and funds managed by GSO Capital Partners LP.
Total cash consideration to Encana under the transaction is US$850 million. In addition, through the transfer of current and future obligations, Encana will reduce its gathering and midstream commitments, which will be substantially complete through 2020, by approximately US$480 million on an undiscounted basis. Further, Encana will transport and market GeoSouthern's Haynesville production on a fee for service basis for the next five years.
Encana will use the total cash consideration to reduce net debt. The company has 80% of its 2015 capital earmarked for assets in the Permian, Eagle Ford, Duvernay and Montney. During the first half of 2015, Encana's Haynesville assets produced an average 217 MMcf/d, contributed approximately 9% to companywide production and less than 2.5% to Encana's first half operating cash flow, excluding hedges.
"This is another step in advancing our strategy. By further focusing our portfolio, we are making Encana more efficient as we proceed through the second half of 2015 and into 2016," said Doug Suttles, Encana president and CEO. "This transaction delivers significant proceeds that we'll use to strengthen our balance sheet. In addition, it eliminates our midstream commitments in the Haynesville and captures ongoing revenue upside through a gas marketing arrangement."
Encana's Haynesville natural gas assets include approximately 112,000 net acres of leasehold, plus additional fee mineral lands. Collectively, they represent Encana's total position in northern Louisiana. Encana operates approximately 300 wells in the area. Estimated year-end 2014 proved reserves were 720 billion cubic feet equivalent (bcfe) of natural gas.
“The transaction comps work out to ~$3,900/Mcfepd (~$5,600/Mcfepd if including discounted value of gathering commitment relief) for 217 MMcfpd of production (9% of 1H:15 production, 2% of cash flow), $1.18/Mcfe for 720 bcfe of proved reserves, or $7,600/acre for 112K acres,” noted analysts with Global Hunter Securities. The analysts view the deal as “in line/positive” as Encana reduces the capital allocated for non-core assets. The analysts believe additional divestitures could include San Juan and DJ Basin assets.
Jefferies LLC, Credit Suisse and Gordon Arata McCollam Duplantis & Eagan, LLC advised Encana on the transaction. GeoSouthern was advised by Kirkland & Ellis and Thompson & Knight. The sale is expected to close in the fourth quarter of 2015 with an effective date of January 1, 2015.