Encana Corp. (TSX: ECA)(NYSE: ECA) subsidiary Encana Oil & Gas (USA) Inc. has reached an agreement to sell its Denver-Julesburg (DJ) Basin assets in Colorado to a new entity 95% owned by the Canada Pension Plan Investment Board (CPPIB) and 5% by The Broe Group. Total consideration to Encana under the transaction is approximately $900 million.
The transaction includes all of Encana's DJ Basin acreage comprising 51,000 net acres. During the first half of 2015, Encana's DJ Basin assets produced an average of 52 million cubic feet per day (MMcf/d) of natural gas and 14,800 barrels per day of crude oil and natural gas liquids. Based on Encana's development plan at year-end 2014, estimated proved reserves were 96.8 million barrels of oil equivalent (over 40% natural gas).
“We think this deal is outside of more core Niobrara acreage (SW portion of the play), thus the low multiple received (~$38.4K/flowing boe) – which we think ascribed little to no value for the undeveloped acreage – isn’t an adequate read-through to our other covered DJ players. With that said, this should be supportive of BCEI’s valuation which is currently hovering around the same $40K/flowing metric; we think BCEI’s undeveloped acreage would receive more support in a potential deal,” said Seaport Global Securities analysts in a note Thursday morning.
Proceeds are expected to help strengthen the company’s balance sheet. When combined with net proceeds from previously announced asset sales, cash proceeds from divestitures in 2015 will total $2.7 billion. The company expects to have reduced its net debt in 2015 by $3 billion by year's end.
The sale is subject to satisfaction of normal closing conditions, regulatory approvals and post-closing and other adjustments. The transaction is expected to close in the fourth quarter of 2015, with an effective date of April 1.
Upon closing, the new Broe Group/CPPIB enterprise will operate as a stand-alone, independent business governed by its own board of directors. The management team is currently being assembled by The Broe Group and is expected to be in place before the end of the year. The Broe Group was advised by Credit Suisse and Vinson & Elkins.