"We are acquiring our partner's 50 percent interest in the prolific Amoruso Field, centered in one of the fastest-growing natural gas trends in North America - the Deep Bossier formation. These assets are a seamless fit with our existing production and operations, and they hold tremendous growth potential in the near and longer term. Strengthening our Deep Bossier position exemplifies EnCana's core strategy - being a leading North American unconventional gas producer," said Randy Eresman, EnCana's President & Chief Executive Officer.
"We began to work on acquiring Leor's remaining interest this spring and becoming the 100 percent owner of the Amoruso Field is the culmination of more than two years of development work along the Deep Bossier geological trend in East Texas. As operator of the Amoruso Field, we have led the exploration, definition and systematic development of this exciting new geological resource since our entry in 2005 until today. In just over 24 months, production from the Amoruso Field has grown from zero to more than 215 million gross cubic feet per day. This is an exciting long-life asset that is at the earliest days of development. It has the potential to be the leading resource play in our North American portfolio," Eresman said.
The Amoruso Field is home to some of the largest producing onshore gas wells in the United States during the past five years. Two of the country's five largest wells since 2002 - Bonnie Ann 1 and South McLean B1 - are in the Amoruso Field. Initial gross production rates in these wells have exceeded 50 million cubic feet per day. The most recent Amoruso well - Laxson - is producing about 65 million gross cubic feet of gas per day. EnCana has seven rigs working in the field now and expects to increase that to about 10 next year.
"This is a resource acquisition. We are investing today for tomorrow's reserves and production growth. This acquisition follows our successful practice of entering a play early, locking up a large land position, applying the right technology and generating value that was previously unrecognized. It is similar to what we have done in plays such as Jonah in Wyoming and Cutbank Ridge in British Columbia," Eresman said.
EnCana estimates the Deep Bossier lands acquired from Leor have about 200 net well locations. Each well costs about $10 million to drill, complete and tie in and is expected to recover between 8 billion and 13 billion cubic feet of gas. This results in estimated ultimate recovery of between 1.3 trillion to 1.8 trillion cubic feet of gas net after royalties. At the midpoint of this range, EnCana estimates that would result in a full-cycle finding, development and acquisition cost of about $3.00 per thousand cubic feet.
When combined with EnCana's existing Deep Bossier interests, the company estimates that it would have a total of about 370 potential drilling locations with a similar range of estimated gas recovery per well. This would put estimated ultimate recovery, on a net after-royalty basis, at between 2.4 trillion and 3.3 trillion cubic feet, resulting, at the midpoint, in a full-cycle finding, development and acquisition cost of about $2.50 per thousand cubic feet. In addition to the Deep Bossier formations, the acquired lands have significant potential in shallower formations that is expected to enhance the ultimate gas recovered and the play's economics.
The Leor acquisition includes:
EnCana entered this Deep Bossier formation play in July 2005 by acquiring a 30 percent interest from Leor, then increased its Amoruso interest to 50 percent in June 2006. EnCana has drilled and operated most of the Amoruso Field's 30 producing wells to date. Current production is constrained, but substantial new processing capacity is expected to come on stream in December with the completion of a new gas plant and a gathering system expansion. EnCana expects production to reach more than 220 million cubic feet per day by year-end and average between 315 million and 355 million cubic feet per day in 2008, up more than double from current levels.
"This Deep Bossier play is among the best new unconventional gas properties in North America," said Jeff Wojahn, Executive Vice-President & President of EnCana's USA Region. "The Deep Bossier geological trend runs along the well-established Bossier shelf, which currently produces more than 1.4 billion cubic feet per day of gas. We have just begun to tap the emerging potential of this deeper accumulation of gas-charged rock. Deep Bossier wells are 15,000 to 20,000 feet deep and intersect shale and sandstone formations that range between 2,000 and 3,000 feet thick."
"With each well drilled, our initial production rates have increased, and our most recent wells have averaged more than 20 million gross cubic feet per day during the first month. Over the past two years, we have conducted extensive seismic mapping, advanced our technical understanding of the geology, optimized drilling targets, lowered well costs and improved recovery rates. This acquisition increases our total land over the Deep Bossier trend to about 215,000 net acres," Wojahn said.
Beyond its superb geological characteristics, this Deep Bossier geological trend is located in a highly-developed oil and gas region that benefits from an experienced and well-established service sector, efficient state regulation and available midstream gas processing. Production is close to major pipelines with ample transportation capacity and the continent's most liquid trading hubs - Henry Hub, Louisiana, the Houston Ship Channel and Carthage, Texas. The asset's location and infrastructure enables producers to capture some of the most attractive netbacks in North America.
EnCana expects the acquisition will be immediately accretive to cash flow and neutral to earnings. EnCana plans to pay for the acquisition with a combination of cash and debt. EnCana has arranged a US$2 billion revolving bridge financing with CIBC to help fund the acquisition. On a pro forma basis after the planned acquisition, EnCana estimates that its net debt-to-capitalization ratio will be about 33 percent, which is in the lower half of the company's targeted range of between 30 and 40 percent. EnCana's net debt-to-adjusted EBITDA multiple, on a trailing 12-month basis, is expected to remain at slightly higher than 1 times, which is at the low end of the company's target range. The acquisition has an effective date of October 1, 2007 and is expected to close before year-end. The transaction is subject to closing conditions and regulatory approvals. EnCana expects to continue its program of non-core asset divestitures in the future.
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