DBRS Comments on Encana’s Acquisition of Eagle Ford Assets

DBRS notes today that Encana Corporation (Encana or the Company; rated BBB with a Stable trend by DBRS) has announced its entry into the Eagle Ford basin with the $3.1 billion cash acquisition of some of Freeport-McMoRan Oil & Gas’s liquid rich assets (the Transaction). The Transaction is not expected to impair the current ratings as Encana is expected to have significant liquidity after this cash-funded acquisition. With $2.3 billion of announced dispositions and $0.8 billion expected from the Clearwater initial public offering, DBRS expects Encana’s cash position to bolster to over $5.0 billion (net of $1.0 billion repayment of its 5.80% May 2014 notes), which DBRS expects to be used for potential acquisitions. Encana’s cash position is expected to be over $2.0 billion after the close of this Transaction, meeting DBRS’s expectations.

From a business risk profile perspective, DBRS considers the Transaction to be positive for Encana as it helps the Company expedite rebalancing of its portfolio away from natural gas and toward higher netback crude oil. Pro forma the Transaction and after giving effect to its recently announced divestitures, Encana’s production mix is expected to improve significantly with the proportion of liquids almost doubling from 10% in December 2013 to approximately 19% after the Transaction. This move is expected to provide Encana an entry into the rich Eagle Ford shale with approximately 86% of the acquired production being liquids (75% crude oil and 11% natural gas liquids).

DBRS notes that the all-cash nature of the Transaction makes it largely credit neutral for Encana’s financial risk profile. Upon closing of the announced transactions, DBRS estimates Encana’s cash position to be approximately $2.0 billion, which provides ample liquidity to fund the Company’s 2014 capital investment program.

Overall, following the completion of the Transaction, Encana’s credit quality is expected to remain within DBRS’s requirements for the BBB rating category.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Oil and Gas Industry (July 2013), which can be found on our website under Methodologies.

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