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Encana's Piceance exit enables liquids-focused growth, analysts say

Encana Corp.'s move to sell off its assets in the Piceance Basin and focus on growth in its more liquids-heavy "core four" North American plays is meeting with approval from analysts.

Encana said June 9 that it reached an agreement to sell its natural gas assets in the basin, located in northwest Colorado, to the Denver-based Caerus Oil and Gas LLC for approximately $735 million. The company will also reduce its midstream commitments in the area by about $430 million while marketing Caerus' production.

The company said the assets involved in the sale include 3,100 operated wells that produce approximately 240 MMcf/d and 2,178 barrels of liquids per day. The capital brought in by the sale and saved by the reduction in midstream commitments in the Piceance will probably be redirected toward the plays Encana has referred to as its "core": the Permian Basin, the Eagle Ford Shale, and the Montney and Duvernay plays of western Canada.

In a note on the deal, Jefferies analyst Zach Parham estimated that Encana would receive $2,900 per flowing MMcfe/d.

"With this transaction, [Encana] has brought forward value of an asset that was not receiving capital, in order to fund growth in its 'core four' (Permian, Eagle Ford, Montney, Duvernay). At current strip prices, we estimate a reduction in [2017] leverage to 2.5x net debt to EBITDA vs. 2.8x prior to the transaction," he said.

Parham, who reiterated a "buy" rating on the company, noted that Encana's interest, and production totals, in the Piceance dropped off in recent years as its focus was elsewhere. "[Encana] has invested very little capital in the Piceance assets over the past several years, as it has chosen to focus spending on its liquids-focused 'Core Four'," he said. "Piceance production has been declining by [approximately] 15-20% per year over the last few years, falling from over 400 MMcfe/d in early 2014 to near ~250 MMcfe/d in [first-quarter 2017]."

Tudor Pickering Holt & Co. also gave Encana's deal favorable reviews in its weekly industry update. "Monetization continues Encana's positive track record of successful active portfolio management, and total transaction value looks favorable vs. our previous estimate of $500-600mm for PDP value," the firm said, adding that Encana will not need to look far to regain the production losses from the sale.

"Given massive inventory depth across [Encana]'s core four, we don't see a need for any offsetting acquisitions, and we'd anticipate proceeds may be kept on the balance sheet for (i) financial flexibility in a lower-for-longer scenario or (ii) Permian acceleration in a better commodity price environment."

Encana is just one of several major players to sell off assets in the gas-heavy Piceance in order to save money to spend on liquids production elsewhere. Both WPX Energy Inc. and Marathon Oil Corp. reached agreements to sell off their acreage in the play in 2016. According to Baker Hughes Inc.'s latest rig count, there are eight active drilling rigs in the seven-county region encompassing the basin.

Encana's stock rose 5.4%, to $9.39 per share, on June 9.