Encana, Canada's largest natural gas producer, is reshuffling its asset portfolio to reduce its exposure to natural gas, and boost oil production. To that end, it has divested, or agreed to divest, some $4.1 billion worth of assets so far this year. Let's take a closer look at which asset Encana might sell next, and what it could mean for the company's future.

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Encana exploring Deep Panuke sale 
Encana is getting ready to sell its Deep Panuke offshore project in Nova Scotia this year, Bloomberg recently reported, citing people familiar with the matter. A potential sale of the project could raise between $1 billion and $2 billion, the people said.

The Deep Panuke project produces and processes natural gas from the Deep Panuke field, located roughly 155 miles southeast of Halifax, Nova Scotia, on the Scotian Shelf. The gas is processed offshore and shipped via a subsea pipeline to Goldboro, Nova Scotia, from where it is transported to end markets in the U.S. Northeast through the Maritimes & Northeast Pipeline.

For Encana, Deep Panuke is a major contributor to production, and an even larger contributor to cash flow. In the first quarter, it produced roughly 253 million cubic feet of gas per day, representing about 9% of the company's total production, and accounted for more than 30% of Encana's first-quarter operating cash flow of roughly $1.1 billion.

However, Deep Panuke doesn't exactly fit well in the company's portfolio, as it doesn't produce higher-value oil or natural gas liquids. Indeed, the company has often stated that it doesn't consider Deep Panuke to be a core asset, and could put it up for sale if the right buyer comes alone.

Encana's new focus
Encana's exploration of a Deep Panuke sale is part of its new strategy, announced late last year by CEO Doug Suttles. It calls for major capital spending cuts including a 20% reduction of its workforce, a reduction of its dividend by 65%, and the sale of non-core mainly gas-rich assets in a bid to improve efficiency, and focus on its most profitable liquids-rich opportunities.

So far this year, Encana has sold or agreed to sell some $4.1 billion worth of assets, including dry gas properties in Wyoming's Jonah field to an arm of private equity firm TPG Capital for $1.8 billion, acreage in east Texas to an undisclosed buyer for $530 million, and the most recent sale of its gas-rich Bighorn assets in northwestern Alberta to privately held Jupiter Resources for about $1.8 billion.

These sales have helped the company bolster its financial position by allowing it to reduce debt and improve liquidity. As of the end of the first quarter, Encana's net debt-to-debt adjusted cash flow ratio improved to 1.2x,  up from 1.5x at year-end 2013, while its cash position improved from $800 million at year-end 2011 to $2.2 billion as of the end of the first quarter.

With a more solid financial footing, Encana can comfortably spend three-quarters of its capital budget on higher-margin liquids plays, which include south Texas' Eagle Ford shale, where Encana recently purchased roughly 45,500 net acres from Freeport-McMoRan for about $3.1 billion, as well as Canada's Montney and Duvernay shales, Colorado's DJ Basin, New Mexico's San Juan Basin, and the Tuscaloosa Marine Shale in Louisiana and Mississippi.

Initial results from these plays have been encouraging, as first-quarter liquids production jumped by 56% year over year to nearly 68,000 barrels a day. Given the stronger margins associated with liquids production, this helped boost the company's first-quarter operating earnings per share by 192% year over year, and its cash flow per share by 87%. As the company further accelerates its liquids production, earnings and cash flow should continue to surge higher.

Investor takeaway
A potential sale of Encana's Deep Panuke project would not only fit well with the company's strategy of focusing primarily on liquids production, but would also raise significant proceeds that would allow it to further delever its balance sheet, and focus on even more profitable liquids-rich opportunities. Following strong initial results from its restructuring strategy, continued success in boosting oil production, earnings, and cash flows could provide a meaningful uplift to Encana's share price.