Monday morning, Canada-based energy company EnCana Corp. (ECA, ECA.TO) said that one of its subsidiaries entered into an agreement to acquire all of the Deep Bossier natural gas and land interests of privately-owned Leor Energy in Texas for US$2.55 billion. Leor and EnCana each currently have a 50% stake in the Amoruso Field in the Deep Bossier formation in East Texas. Further, EnCana said it expects the acquisition to be immediately accretive to cash flow as well as be neutral to earnings and added that it intends to pay for the acquisition with a combination of cash and debt. The acquisition has an effective date of October 1, 2007 and is expected to close before year-end. The transaction is subject to closing conditions and regulatory approvals.
EnCana said that the acquisition includes Leor's 50% interest in the Amoruso Field, daily gas production of about 75 million net cubic feet per day, about 26,600 net acres of land in Amoruso and about 9,100 net acres of offsetting land to the east at South Hilltop. The acquisition also includes about 20,600 net acres of other undeveloped lands in Robertson and Madison counties and total East Texas land of about 56,300 net acres, the vast majority of which is undeveloped. The Deep Bossier geological trend runs along the Bossier shelf, which currently produces more than 1.4 billion cubic feet per day of gas.
EnCana said it arranged a US$2 billion revolving bridge financing with CIBC to help fund the acquisition. After the planned acquisition, EnCana estimates that its net debt-to-capitalization ratio on a pro-forma basis will be about 33%, which is in the lower half of its targeted range of between 30 and 40%.
Commenting on the deal, Randy Eresman, President & CEO of EnCana said, We are acquiring our partner's 50 percent interest in the prolific Amoruso Field, centered in one of the fastest-growing natural gas trends in North America - the Deep Bossier formation. These assets are a seamless fit with our existing production and operations, and they hold tremendous growth potential in the near and longer term.
Eresman added, As operator of the Amoruso Field, we have led the exploration, definition and systematic development of this exciting new geological resource since our entry in 2005 until today. In just over 24 months, production from the Amoruso Field has grown from zero to more than 215 million gross cubic feet per day.
Houston, Texas-based Leor Energy is an exploration and production company focused primarily on unconventional gas in North America. The company holds one of the largest acreage positions in the prolific Deep Bossier trend of East Texas. During May 2007, gas production from Leor's Amoruso Prospect exceeded 215 MMcf/d gross, which represented a more than two-fold increase since the beginning of 2007.
Leor and the U.S. subsidiary of EnCana Corp. entered into an agreement In July 2005 to explore and develop Leor's Amoruso Prospect in Robertson County, Texas pursuant to an arrangement that provided EnCana an opportunity to earn a working interest in Leor's acreage by drilling and completing a certain number of wells at EnCana's cost.
In July last year, Leor sold approximately 3,360 net acres in its holdings in the Amoruso Prospect to its joint-venture partner, EnCana, for US$242.9 million. The transaction resulted in Leor and EnCana each having a 50% stake in the prospect going forward. Following the transaction, Leor held a 23,725 net acre position in the prospect.
In May this year, Leor increased its footprint in the Deep Bossier by making an equity investment in Navasota Resources Ltd., LLP. Navasota holds a two-thirds working interest in approximately 15,000 gross acres of Deep Bossier acreage in Robertson County, Texas and its acreage is adjacent to Leor's Amoruso Prospect.
EnCana noted that the Amoruso Field is home to some of the largest producing onshore gas wells in the United States during the past five years and added that two of the country's five largest wells since 2002 are in the Amoruso Field. The company further said that the most recent Amoruso well, Laxson, is producing about 65 million gross cubic feet of gas per day. EnCana has seven rigs working in the field now and expects to increase it to about ten next year.
EnCana said that it estimates the Deep Bossier lands acquired from Leor have about 200 net well locations and added that each well costs about US$10 million to drill and is expected to recover between 8 billion and 13 billion cubic feet of gas. The company noted that this would result in estimated ultimate recovery of between 1.3 trillion-1.8 trillion cubic feet of gas net after royalties. Further, the company said that at the mid point of the range, it estimates that would result in a full-cycle finding, development and acquisition cost of about US$3.00 per thousand cubic feet.
EnCana said that when combed with its existing Deep Bossier interests, it estimates it would have a total of about 370 potential drilling locations with a similar range of estimated gas recovery per well. Further, the company said this would put estimated ultimate recovery, on a net after-royalty basis, at between 2.4 trillion and 3 trillion cubic feet, resulting at the mid-point, in a full-cycle finding, development and acquisition cost of about US$2.50 per thousand cubic feet. EnCana noted that in addition to the Deep Bossier formations, the acquired lands have significant potential in shallower formations that are expected to enhance the ultimate gas recovered as well as the play's economics.
EnCana entered the Deep Bossier formation play in July 2005 by acquiring a 30% interest from Leor and later increased its Amoruso interest to 50% in June 2006. EnCana said that it has drilled and operated most of the Amoruso Field's 30 producing wells to date and noted that the current production is constrained. However, substantial new processing capacity is expected to come on stream in December with the completion of a new gas plant and a gathering system expansion. The company expects production to reach more than 220 million cubic feet per day by year-end and average between 315 million and 355 million cubic feet per day in 2008, which is more than double the current levels.
EnCana said that it expects to continue its program of non-core asset divestitures in the future.
Last month, EnCana said that it intends to cut capital investment in Alberta for 2008 by 30-40% if the recommendations of Alberta Review Panel Report are adopted. EnCana said it conducted an evaluation of recommendation and plans to cut around US$1 billion of the US$2.5-US$3 billion investments it planned for Alberta based activity. The company plans to reduce uneconomic or uncompetitive natural gas activity in the proposed royalty scheme areas. Further, the company plans to reallocate capital to investments outside Alberta.
For the recent third quarter, EnCana reported a net income that declined to US$934 million or US$1.24 per share from US$1.34 billion or US$1.65 per share in the same quarter of the previous year, on higher costs. Operating earnings for the quarter declined to US$961 million or US$1.27 per share from US$1.08 billion or US$1.31 per share in the previous-year quarter. Revenues, net of royalties were US$5.60 billion, compared to US$4.03 billion in the comparable quarter last year.
ECA closed Friday's regular trading session on the NYSE at US$72.48, up US$1.79 on a volume of 4.06 million shares. In the 52-week period, the stock has been trading in a range of US$42.38-US$72.58.
ECA.TO closed Friday's regular trading session on the Toronto Stock Exchange at C$67.77, up C$0.37 on a volume of 2.93 million shares. In the 52-week period, the stock has been trading in a range of $51.55-$71.21.
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