Encana Corporation Strikes Another Transformational Deal

In an effort to shed assets, Encana Corporation (TSX:ECA)(NYSE:ECA) unloaded one of its core properties. What’s next?

Last month, we commented on how Encana Corporation (TSX:ECA)(NYSE:ECA), a major natural gas producer, would likely need to sell assets to complete its transition to an oil producer. In 2015 the company had already sold $2.8 billion in assets, but sources told Reuters that it was open to offers on every one of its non-core assets. It turns out that even some of its four core assets were up for grabs.

This week, Encana announced a $625 million deal to sell assets in northwestern Alberta. The sale includes wells producing 25,200 barrels of oil equivalent a day on about 22,000 hectares of land. Encana said the deal also means it can avoid future spending commitments of $100 million on the property, allowing it to focus on other core areas in Canada and the United States.

How will the deal position Encana for the future?

Over the last 18 months Encana has engaged in a major operational pivot. Over $3 billion in assets have been sold, $2 billion in debt repaid, and half of its workforce laid off. With its latest deal, total drillable locations are down to just 9,000 wells in the Montney Basin. However, two-thirds of these remaining wells are located in the highest-quality, resource-rich part of region.

“We are tightening our portfolio and sharpening our focus in the Montney where we expect to grow liquids production to 50,000 barrels per day by the end of 2018,” Encana CEO Doug Suttles said of the move.

The move towards oil is simplified

In just three years oil has grown from 5% of production to nearly 20%. The latest deal should help accelerate that shift. Already, 96% of Encana’s capital expenditures were dedicated to its four core properties. Because those properties are largely oil producing, Encana’s output should slowly shift away from natural gas. By 2018 natural gas will likely comprise less than 50% of production, down from 82% in 2014.

Shedding assets in the Montney Basin helps considerably. Over 90% of the production at those wells was either natural gas or natural gas liquids. Just 9% stemmed from oil output. Compare this with the company’s Duvernay property, which produces 48% oil. In the Eagle Ford, oil production is even higher at 73% of output. Even Encana’s 146,000 acres in the Permian Basin produces roughly 46% oil.

In May Bloomberg reported that Encana was “weighing the sale of some of its shale assets in western Canada.” While the latest deal is no doubt a part of that plan, don’t be surprised to see the company offload more of its Montney assets given it represents the fastest way to transform itself into a major oil producer.

If you’re an Encana shareholder, this latest deal is great news. Oil generally has better market conditions and, based on Encana’s cost of production, would come with higher profit margins. So far, the company is making all the right moves.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »