PetroChina pays CAD 5.4 bn for Canadian gas assets

Encana Corp will sell half of a prolific Canadian shale gas project to PetroChina for CAD 5.4 billion (USD 5.4 billion), marking the largest Chinese investment yet in a foreign natural gas asset.

Encana, one of the North America's largest gas producers, and state-owned PetroChina agreed to form a 50-50 joint venture to develop the Cutbank Ridge lands in the westernmost province of British Columbia over several years. The deal came after nine months of talks, the Canadian company said on Wednesday.

The venture will allow EnCana to accelerate development of its vast reserves while keeping a lid on capital investments at a time when natural gas markets are weak. For the Chinese, it's another step toward the country's goal of tripling the use of the lower-carbon fuel over the next decade.

The deal is surprisingly rich considering North American gas prices are languishing under the weight of high inventories and the potential production that new technology has opened up in hard-to-reach shale formations.

The price tag represents 3.8% of Encana's 2010 estimated production for 24% of its market capitalization.

"This is an outstanding valuation for Encana," CIBC World Markets analyst Andrew Potter said.

The value of the deal surpasses PetroChina's USD 3.1 billion joint bid with Royal Dutch Shell to buy Australia's coal-seam gas player Arrow Energy last year.

It's also worth more than the largest previous Canadian energy buy, Sinopec Corp's USD 4.65 billion acquisition of ConocoPhillips' stake in the Syncrude Canada oil sands venture.

Cutbank Ridge, comprising 635,000 net acres (257,000 hectares) in northeastern British Columbia, currently produces 255 million cubic feet of gas a day from proved reserves of about 1 trillion cubic feet.

China is looking to fuel its huge and growing economy, and shale gas and the oil sands of British Columbia's neighboring province of Alberta have become a big focus.

"They want expertise and they want gas they can bring back home," Potter said.

PetroChina is not alone. Last month, Chesapeake Energy Corp struck its second shale deal with CNOOC Ltd as China's top offshore oil producer agreed to take third of the US company's Niobrara acreage in Colorado and Wyoming for USD 570 million.

That followed an USD 1.1 billion agreement between the two for acreage in the Eagle Ford Shale in South Texas in October.

Encana, meanwhile, has said it has numerous other properties in British Columbia, the US Rockies, Texas and Louisiana it is offering to potential partners.

It agreed with Korea Gas Corp last year to jointly develop two shale gas plays, where companies employ new horizontal drilling and rock fracturing technology.

Encana executives have already said they plan to reduce capital spending in 2011 to cope with low gas prices. The company is expected to detail its budget in fourth-quarter results due to be released on Thursday.

The deal is subject to approvals by the Canadian and Chinese governments, Encana said.

Encana shares closed down 60 Canadian cents, or 2%, at CAD 30.65 on the Toronto Stock Exchange. It announced the deal after the market closed.