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) 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), 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) 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.

Encana's balance sheet is not in bad shape, but it is not pristine either, and the FirstEnergy Capital analyst said the some investors had been concerned about the company outspending its cash flow over the next few years, too. The deal with PetroChina should allow Encana to accelerate development more than it could alone, while spending half of the capital.

Back of the envelope math suggests that PetroChina was paying roughly $8,000 per acre, FirstEnergy Capital's Dunn said.

Chesapeake Energy ( CHK) was the most recent energy company to sign a shale deal with the Chinese, when it announced in January a joint venture with CNOOC ( CEO). CNOOC already had a joint venture with Chesapeake before the January announcement.

The Encana assets are in what is referred to as the Montney Shale. Any deal in the North American shale plays will spark rumors of coming M&A action.

The FirstEnergy Capital analyst said that among Canadian plays, names potentially to be linked to the Encana deal in speculative trading action would include Progress Energy Resources ( PRQ), Painted Pony, Daylight Energy ( DAY), Advantage Oil & Gas ( AAV), Birchcliff Energy ( BIR) and Celtic Exploration ( CLT).

The Encana-PetroChina JV represents current daily production of about 255 million cubic feet equivalent per day (MMcfe/d), proved reserves of about 1 trillion cubic feet of natural gas equivalent (Tcfe), as at the end of 2010, and about 635,000 net acres of land straddling the British Columbia and Alberta boundary, Encana said in a statement.

The Encana assets also include about 700 million cubic feet (MMcf) per day of processing capacity, about 3,400 kilometres of pipelines and a natural gas storage facility.

-- Written by Eric Rosenbaum from New York.

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