Encana’s PetroChina partnership may be first of many

Encana Corp. (ECA)’s C$1.18 billion ($1.2 billion) joint venture with state-owned PetroChina Co. (857) signals the first of many foreign deals as companies seek to navigate new Canadian rules that favor minority stakes over takeovers.

Athabasca Oil Corp., Talisman Energy Inc. (TLM) and Canadian Natural Resources Ltd. (CNQ) may attract overseas investors eager to gain access to oil and natural gas resources, as the companies seek funds for drilling and development costs.

“There are probably going to be more joint ventures,” said Leo De Bever, who oversees C$70 billion including Encana shares as chief executive officer of Alberta Investment Management Corp. in Edmonton. “Now that there is some clarity on the rules, people may feel less hesitant about getting into something that has political overtones, rather than just economic overtones.”

The agreement between Encana, Canada’s largest gas producer, and Beijing-based PetroChina is the first since Prime Minister Stephen Harper unveiled new restrictions on Dec. 7 for state-owned companies seeking to invest in the oil sands. PetroChina’s 49.9 percent stake in the joint venture is in line with the rules, which prohibit purchases by state-owned enterprises unless there are “exceptional circumstances.”

Joint ventures are the “way of the future” for companies like Encana and Canadian Natural, said John Stephenson, who helps manage C$2.7 billion at First Asset Investment Management Inc. including Encana shares.

“Encana has tons of land but so what?” Stephenson said by phone from Toronto on Dec. 13. “It’s been harder for them in a low gas price environment to make any dough.”

Minority Stake

Under the joint venture agreement, announced Dec. 13, PetroChina will get a 49.9 percent stake in Encana’s Duvernay Shale acreage in Alberta for C$1.18 billion upfront and C$1 billion in development costs during the next four years.

Athabasca Oil, Talisman and Canadian Natural also have acreage in the Duvernay, a formation that holds an estimated 443 trillion cubic feet of gas and 61.7 billion barrels of oil, according to Canada’s Energy Resources Conservation Board.

Athabasca Oil, holder of the largest publicly disclosed Duvernay rights with 640,000 acres, had its biggest two-day rise since September after the PetroChina deal was announced. Heather Douglas, a spokeswoman for the Calgary-based company, said CEO Sveinung Svarte wasn’t available to comment on potential joint ventures.

The size of Athabasca Oil’s Duvernay position, its ownership of infrastructure and recent drilling results make the company a “prime candidate” for a future joint venture, Jared Dziuba and Randy Ollenberger, analysts for BMO Capital Markets Corp. in Calgary, said in a Dec. 13 note.

Taking Partners

“This is an area where smaller companies will have to take partners in the future if they want to develop in a timely fashion,” Athabasca Oil’s Svarte said on Oct 16.

Talisman Chief Financial Officer Scott Thomson said Sept. 6 that the Duvernay is among several areas where the company is considering seeking a partner for its acreage. Phoebe Buckland, a spokeswoman for the Calgary-based company, didn’t respond to phone and e-mail messages seeking comment.

The PetroChina purchase, which equates to C$9,800 an acre in the Duvernay, implies a valuation of as much as C$6 billion for Athabasca Oil’s Duvernay land position, according to Dziuba and Ollenberger. Canadian Natural’s 500,000 acres would be worth C$4.9 billion and Talisman’s 350,000 acres C$3.4 billion, Phil Skolnick, an analyst at Canaccord Genuity Corp. in New York, said in a Dec. 13 note.

Advance Talks

Talisman and Canadian Natural both gained on the day the Encana agreement was announced. Talisman has dropped 15 percent this year and Canadian Natural is down 27 percent.

Encana has been pursuing a strategy of asset sales and joint-venture agreements to boost cash flow as North American gas prices dropped to a decade-low in April.

The company talked to the government in advance “to ensure that our understanding was consistent and this kind of transaction was the kind of transaction that the government would welcome,” Encana Chief Executive Officer Randy Eresman said in a Dec. 13 phone interview.

Mao Zefeng, a spokesman for PetroChina in Beijing, didn’t respond to an e-mail seeking comment outside of regular business hours.

Harper, who approved Chinese-owned Cnooc Ltd. (883)’s $15.1 billion purchase of Nexen Inc. (NXY) on Dec. 7, said the purchase marks the “end of a trend” in the oil sands.

Shifting Gears

Canada is deciding whether the PetroChina deal will be reviewed, Margaux Stastny, a spokeswoman for Industry Minister Christian Paradis, said in a Dec. 13 e-mail.

Encana has reported as much as 300 barrels of petroleum liquids per million cubic feet of gas in the Duvernay, a formation analysts and executives have likened to the liquids- rich Eagle Ford Shale in Texas. Petroleum liquids include ethane, butane and propane that typically fetch higher prices than gas.

Chinese state-owned companies will continue to invest in Canada in similar sized deals to the joint venture between Encana and PetroChina, said Gordon Houlden, director at the University of Alberta’s China Institute in Edmonton.

“China will shift gears” to adhere to the new guidelines, said Houlden.