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Summary and Recommendation
Buy-recommended Encana Corporation (NYSE:ECA) announced a multi-billion dollar joint venture that demonstrates the value of natural gas resources we estimate are worth at least Net Present Value (NPV) of $51 a share. Buy-recommended PetroChina (NYSE:PTR) would pay C$5.4 billion for a 50% interest in ECA’s Cutbank Ridge assets, which include a majority of the company’s Montney formation play along the border of Alberta and British Columbia. The value of C$5.4 billion would be 11% of our total Encana Present Value for resources that may be 8% of Encana’s total resources. The 50% interest would represent proven reserves of about 1 trillion cubic feet (Tcfe), 7% of ECA total, and production of 255 million cubic feet equivalent daily, about 8% of Encana total, and 635,000 net acres of land.
On the follow up call, management was clear that C$5.4 billion represented the present value of those resources. Meanwhile, second quarter results released today (2/11/2011) were consistent with our estimates for unlevered cash flow (Ebitda) in today’s low natural gas price environment (see table Next Twelve Months Operating and Financial Estimates). Preliminary disclosures of year-end reserves lead us to an adjusted life index of 14.2 years, including proven reserves by U.S. protocol and three-tenths of probable reserves (see table Functional Cash and Present Value). Though values of resources that are mostly undeveloped are inherently speculative, the PetroChina deal highlights undervaluation in Encana stock.
Originally published on February 10, 2011