TLM

Canadian natural gas company EnCana Corporation (ECA) announced that one of its subsidiary, EnCana Oil & Gas, intends to divest its North Texas natural gas producing assets in the Fort Worth Basin located in the Barnett Shale play by late 2011 or early 2012. However, the sale is subject to receiving an acceptable bid, approval of the companies’ boards of directors and other customary conditions and regulations.   

The asset, which is well poised for future development, was acquired in 2004 under the company’s corporate acquisition initiative targeted to build a major land and production position in the U.S. Rockies. The assets currently possess a production capacity of about 125 million cubic feet equivalent per day (MMcfe/d). The sale also includes the processing and pipeline facilities on 52,000 net acres of land in the basin.

Encana, which owns about 7 million net acres of undeveloped land with high resource potential, embarked upon the strategy to dispose high cost and low profit generating assets to re-design its property portfolio and trim down costs.

Currently, EnCana is in talks with a number of prospective buyers for the sale undeveloped acreage across the U.S. and Canada. The company aims to pursue a divesture program of $1 billion - $2 billion in 2011.

The proceeds from the sale are expected to enhance EnCana’s financial position that currently stands with a debt-to-capitalization ratio of 32.2% as of the second quarter of 2011. This step will also help the company to generate substantially higher cash flow (recorded $4.4 billion in 2010) in 2012 and pay a stable dividend to the shareholders (currently yielding an attractive 3.3%).

Headquartered in Calgary, Alberta, EnCana is the second largest gas producer in North America, and holds a highly competitive land and resource position in a number of the region's most promising shale and tight gas resource plays. This provides the company with a low risk, long-life, and sustainable growth profile.

However, we believe that at current levels, these positives are reflected well in the stock and the company will perform at par with other industry players. Hence, we maintain our long-term Neutral recommendation for the shares. EnCana, which competes with Cabot Oil & Gas Corporation (COG) and Talisman Energy (TLM), holds a Zacks #3 Rank (short-term Hold rating).

 
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