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Energy Winners: Encana's $5 Billion China Deal

(Encana, PetroChina deal story updated for Encana earnings)

NEW YORK ( TheStreet) -- Shares of Canadian natural gas company Encana (ECA - Get Report) rose by more than 7% in on Thursday morning, as a result of its $5.4 billion joint venture with Chinese energy giant PetroChina (PTR - Get Report), announced after the close on Wednesday.

The spike in Encana shares had been as high as 10% in after-hours trading on Wednesday, but on Thursday morning the company reported quarterly results that missed Street estimates and included a net loss. Encana reported much higher than normal hedging losses, at $269 million, which was more than twice the level of the hedging loss in the previous year's comparable quarter. Excluding the one-time charges, Encana earnings of 9 cents missed the Street consensus of 19 cents.

The deal between Encana and PetroChina provides a 50% interest in Encana's Cutbank Ridge business assets in British Columbia and Alberta.

The Encana joint venture is among the largest transaction announced in recent years for North American shale gas assets, and the recent in a string of deals involving Chinese national energy companies buying up North American shale assets.

In terms of deal value, Royal Dutch Shell (RDS.A - Get Report) acquired East Resources for $4.7 billion last year.

Mike Dunn, analyst at FirstEnergy Capital, said the Encana joint venture was not a complete surprise, but the specifics of the deal with PetroChina are notable. Encana had been talking to the market about a joint venture since last summer, and said it would be on an order of magnitude bigger than a $565 million deal it made last year with Kogas Canada, an affiliate of Korea Gas. Encana had also told the market that it was in discussions with potential Chinese partners at that time.

Yet the FirstEnergy Capital analyst says the deal will still surprise the markets for three reasons: the price being paid relative to the total amount of assets being given up; the fact that it is an all-cash deal; and the fact that it's even higher than the price Royal Dutch Shell paid for East Resources, which Dunn said could make the Encana deal the largest shale asset deal ever.

Elaborating on these points, the analyst said that Encana had been leading people to believe the joint venture might be done for a larger subset of its Canadian asset base, potentially involving the Horn River.

The fact that Encana was able to gain $5 billion in the deal without given up more of the portfolio will be viewed as a positive by investors. Additionally, many of the recent deals in the shale plays have included large capital carries, as opposed to upfront cash payment. Finally, with the talk last summer about a potential JV, this removes the uncertainty among investors about an attractive deal never getting done.

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SYM TRADE IT LAST %CHG
AAV $5.97 0.00%
CHK $14.54 0.00%
ECA $14.00 0.00%
PTR $130.05 0.00%
RDS.A $62.76 0.00%

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