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Encana-Mitsubishi Cutbank Tie Up

Zacks Equity Research

Encana Corporation (ECA) and Japanese big shot Mitsubishi Corporation joined hands in the Cutbank Ridge Partnership, which was first announced in February 17.

Upon closure, Mitsubishi took over 40% interest in the Cutbank Ridge Partnership for approximately C$1.45 billion. The company will also invest another C$1.45 billion over the next five years for the development of the project. The funding on part of Mitsubishi will trim Encana’s capital spending on the project to 30% of the total estimated expenditure.

Encana will, however, control the remaining 60% stake and continue to act as the operator of the Partnership that spreads over 409,000 net acres of undeveloped Montney natural gas lands in British Columbia, along with additional development potential in the Cadomin and Doig geological formations.

This deal excludes Encana’s current Cutbank Ridge production of about 600 million cubic feet of natural gas per day, processing plants, gathering systems or the Alberta landholdings.

The Cutbank Ridge boasts of being one of the most fertile and low-cost resource rich acreage in North America. With large proved undeveloped natural gas reserve, the region is expected to have the capacity of delivering long-term, affordable energy supplies to domestic and overseas markets.

We remain highly optimistic about this collaboration and expect the Partnership to be successful, based on Encana’s leadership position in the North American natural gas market and Mitsubishi's healthy financial profile.

This alliance is part of Encana’s strategic initiatives targeted toward redesigning the company’s asset and operational structure. In this regard, the company recently divested some of its properties in the Cutbank Ridge area to Calgary-based Veresen Inc. for approximately C$920 million.

Encana also completed the sale of its majority stake at the Cabin Gas Plant in Horn River Basin to Enbridge Inc. (ENB) for $215 million and dispensed most of its natural gas producing assets in North Texas to EnerVest, Ltd. for $860 million.

We are maintaining our long-term Neutral recommendation on the stock. Encana shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.

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