Yesterday Encana (NYSE:ECA) announced that it was selling $1.8 billion in natural gas properties. What was interesting isn't that Encana was selling, but who is buying. That's because it was private equity firm TPG Capital that is shelling out the cash and not a strategic buyer. TPG Capital obviously thinks these natural gas assets will be worth far more in the future, so does that means it's a good time to join in and invest in natural gas?
Details on the deal
Before we can answer that question we need to take a closer look at what TPG Capital is picking up from Encana. These assets are located in the prolific Jonah field in Wyoming and consist of about 24,000 developed acres and more than 1,500 active wells. In addition to that, the transaction includes more than 100,000 undeveloped acres adjacent to Jonah that are known as the Normally Pressured Lance area.
These are assets that just a few weeks ago were rumored to be heading elsewhere. There were reports that Encana was in advanced talks on a $2 billion sale to a joint bid by the Carlyle Group and NGP Energy Capital Management. It would appear that the joint bid fell apart, enabling TPG Capital to get its deal done for about 10% less than the previously rumored price. So, is TPG Capital is getting a deal on its big bet on natural gas?
Details on the Jonah field
The Jonah field is well liked by natural gas producers because it's a long-life, low-decline field. The nature of the field is a reason why upstream MLP LINN Energy (NASDAQOTH:LINEQ) spent just over a billion dollars to acquire BP's (NYSE:BP) assets in the Jonah field two years ago. As the following slide shows, LINN Energy bought an asset that not only provided significant current production and cash flow, but was loaded with low risk upside.
The low 14% decline rate is really important to LINN Energy as it means the company doesn't need to invest a lot of capital to maintain production. Because of that LINN Energy will only invest about 14% of its 2014 capital spending plan on the Jonah field. Those funds enabled LINN to not just maintain current production but grow it so that it can offset production declines elsewhere and make its overall decline rate more manageable.
Other natural gas focused producers like Ultra Petroleum (NASDAQ:UPL) are also drawn to the long-life, low-cost nature of the Jonah field as the following slide shows.
By focusing on low-cost natural gas assets like those in Wyoming, Ultra can keep its natural gas production roughly flat so that it becomes a cash cow for the company . It can then use that cash flow to fund its more lucrative oil program. That plan has the company growing its EBITDA by 40% this year. As natural gas prices move higher, Ultra can easily increase its capital spend to grow production and cash flow in the future.
While there's upside to the Jonah field acreage that TPG Capital is acquiring, the real key to this deal is that these are cash flow producing assets. It's a low-risk bet on the long-term future of natural gas. It's a solid deal for TPG Capital, but its not a real out-sized bet on the future of natural gas given the low-risk natural of the Jonah field.