EnCana, PetroChina end C$5.4 billion Canada shale deal

CALGARY, Alberta Tue Jun 21, 2011 5:28pm EDT

An employee walks towards a pump jack at a PetroChina plant in Shanshan county of Hami, Xinjiang Uigur Autonomous Region July 24, 2008. REUTERS/Stringer

An employee walks towards a pump jack at a PetroChina plant in Shanshan county of Hami, Xinjiang Uigur Autonomous Region July 24, 2008.

Credit: Reuters/Stringer

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CALGARY, Alberta (Reuters) - China's biggest North American energy deal was called off on Tuesday, as Encana Corp and PetroChina failed to reach terms for a C$5.4 billion ($5.6 billion) joint venture to develop a Canadian shale gas field.

Encana, Canada's No. 1 natural gas producer, said the two companies could not find common ground, despite a year of negotiations, and walked away from a deal that would have seen PetroChina take a one-half stake in Encana's massive Cutbank Ridge field in northern British Columbia.

"We just reached the point where we determined we just couldn't go forward" said Alan Boras, a spokesman for Encana.

The deal would have been the largest in a string of investments by Asian companies in North America's prolific shale gas discoveries, while Encana investors were counting on the cash to shore up a balance sheet battered by more than two years of weak natural gas prices.

No details were offered on what led to the collapse of the talks. Encana said confidentiality agreements prevented further disclosure and PetroChina saying only that the deal's demise did not affect its strategy.

"The call-off of the deal is because we didn't reach agreement during the negotiation. It won't affect PetroChina's overseas strategy and development planning in North America," said a PetroChina official who declined to be identified.

Encana was expected to use the PetroChina investment to speed development of its massive unconventional natural gas reserves, despite weak North American prices for the fuel, as well as cut debt and buy back shares with the proceeds.

"They would have had room to buy back C$2 billion to C$3 billion in stock," said Andrew Potter, an analyst at CIBC World Markets, "It would have been a nice vote of confidence in how they saw their own value and a nice support for their share price."

EnCana shares fell 42 Canadian cents, or 1,4 percent, to C$29.06 on the Toronto Stock Exchange, while the exchange's energy index rose 1.8 percent.

"In terms of having a cleaner balance sheet, it's disappointing but it's not like the company is struggling," said Les Stelmach, a portfolio manager at Bissett Investment Management, which controls about 1 million Encana shares.

"In terms of their overall capital structure, they are still fine."

CHINESE INVESTMENTS

The joint venture was to be the largest of a number of Chinese investments in North America. State-controlled PetroChina wanted new energy supplies to power China's booming economy and to gain a technical understanding of shale gas development, while Encana aimed to share the costs of developing its Canadian shale gas properties.

"PetroChina planned to learn shale gas technology through the joint venture with Encana, and planned to ship gas produced from the project back to China to supply tight domestic market. Now all these are gone," said UOB Kay Hian analyst Yan Shi. "But PetroChina is also learning shale gas technology from Australian company Arrow Energy."

The initial agreement between the Chinese and Canadian companies followed similar deals by Anadarko Petroleum Corp and others with Asian companies such as Korea National Oil Corp.

The collapse is another setback for Randy Eresman, Encana's chief executive, who was forced last year to scale back plans to double gas production by 2015 when investors balked.

"Randy has some egg on his face," said George Toriola, an analyst with UBS Securities. "No CEO wants to be in the position he's in right now, where you announce a big deal then come back and have to say, 'Oh by the way, it's not going to happen'. That's not good. It's two strikes now."

Encana said it is likely to hunt for other partners willing to invest in Cutbank Ridge and may look to raise cash from its pipeline and gas-processing assets in the region.

It is still in talks to form joint ventures with companies wanting a stake in its Horn River and Greater Sierra shale gas properties in northeastern British Columbia and expects those deals, along with some planned asset sales, to generate as much as $2 billion in proceeds this year, exceeding its target of $500 million to $1 billion.

Encana said it was still on track to meet 2011 forecasts. and will look for transactions for its midstream pipeline and processing assets in the area.

($1=$0.97 Canadian)

(Additional reporting by Wan Xu in Beijing and Aftab Ahmed in Bangalore; editing by Janet Guttsman and Rob Wilson)

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