Encana Sells San Juan Assets To DJR Energy For $480 Million

Encana Corp. (NYSE: ECA) is exiting another position, this time in the San Juan Basin, as the Calgary, Alberta-based company further zeros in on its four-basin strategy.

Denver-based DJR Energy LLC agreed to acquire Encana’s San Juan assets located in northern New Mexico for $480 million. The assets include about 182,000 net acres. Production from the assets averaged roughly 5,400 barrels of oil equivalent per day (boe/d) in 2017, including 3,900 barrels per day of liquids.

DJR is a private E&P formed in April 2017 by Dave Lehman, a former executive with Exxon Mobil Corp. (NYSE: XOM) who had been with the oil major for 27 years. The company is funded by Trilantic Capital Management LP, Waveland Energy Partners and Global Energy Capital.

At $35,000 per flowing boe, Zach Parham, equity analyst with Jefferies LLC, said the transaction implies an undeveloped value of roughly $1,600 per acre for Encana’s San Juan assets. Parham noted this is slightly higher than the roughly $920 per acre Jefferies estimated WPX Energy Inc. (NYSE: WPX) received from its sale of San Juan assets earlier this year.

“At the time, we had estimated that Encana’s San Juan package could be valued at $300 million to $400 million, though we give credit to no undeveloped value in our current $17 Encana net asset value,” Parham said in a research report on Oct. 1.

Analysts with Tudor, Pickering, Holt & Co. (TPH) viewed Encana’s transaction as a positive surprise adding it was “good to see the company continue high-grading its portfolio via the monetization of its San Juan position, an asset that has been in consideration for some time and certainly not part of the company’s core four.”

In 2013, Encana launched a strategy to invest more in liquids and focus nearly all of its capital on four asset bases: the Permian, Eagle Ford, Duvernay and Montney. Throughout the years, the company has sold assets in the Denver-Julesburg (D-J) Basin, Piceance Basin, Haynesville Shale and others in pursuit of this strategy.

“This transaction is consistent with our strategy and our objective of delivering quality returns to our shareholders. It adds to our financial strength and is aligned with our focus on maximizing the value of our assets and disciplined allocation of capital,” Doug Suttles, Encana’s president and CEO, said in a statement. “This is a very exciting year for our company as we deliver strong growth and generate free cash flow, demonstrating the strength and quality of the business we have built.”

Parham said he believe the proceeds could be used to further expand Encana’s buyback program, as the company will generate about $400 million in free cash flow during the second half of 2018.

TPH analysts also noted that some investors would like to see continued improvement to Encana’s existing corporate buyback program, but said the company could also deploy the capital across its balance sheet and core four asset base as well.

“Some modest and selective acceleration towards deepening inventory via core expansion/delineation may make sense, which we think would be geared towards the Lower 48 given liquids processing timing in the Montney and relative economics vs. the Duvernay,” TPH analysts said in an Oct. 1 research note.

As a result of the transaction with Encana, DJR expects to have more than 350,000 net acres focused in the oil window of the San Juan Basin, according to the company press release.

At close of the pending acquisition, DJR will have production of more than 6,000 boe/d and hold an inventory of over 1,100 high-value drilling locations boasting breakevens “competitive with other premier oil basins,” the company said.

Since 2002, the DJR management team has successfully created and sold two predecessor companies, DJ Resources LP and DJ Resources LLC, in the D-J Basin of Colorado. However, now the team has turned their attention to the San Juan Basin.

Lehman, president and CEO of DJR, said following its acquisition from Encana the company is “now poised to become a dominant player in the San Juan Basin as we combine [Encana’s] asset with our existing footprint and focus our efforts on further developing our acreage.”

Latham & Watkins LLP and Davis Polk & Wardwell LLP was legal advisers to DJR and Trilantic North America. Encana said it expects to close the transaction in fourth-quarter 2018 with an effective date of April 1.

Emily Patsy can be reached at epatsy@hartenergy.com.