Cenovus Energy Inc. and one of its subsidiaries have entered into an agreement to sell the general partnership that holds the Pipestone and Wembley natural gas and liquids business in northwestern Alberta for cash proceeds of $625 million.

NuVista Energy Ltd. in a separate release said it was the buyer.

The transaction also includes the Pipestone Business’s 39 per cent operated working interest in the Wembley gas plant. The sale is expected to close in the third quarter of 2018, subject to customary closing conditions.

“I’m pleased with this important step towards streamlining and rationalizing our acreage in the Deep Basin,” said Alex Pourbaix, president and chief executive officer. “These are high quality assets and we believe the Pipestone transaction will provide compelling value for Cenovus shareholders.”

As with previous divestitures, proceeds from this sale will be used to further deleverage the company’s balance sheet.

Cenovus is in various stages of evaluating and marketing other non-core Deep Basin assets for potential divestment. The company is encouraged by the high level of interest it has seen in these processes “but remains resolute that all asset dispositions are contingent upon receiving fair value for the company’s shareholders.”

Core of condensate: NuVista

The assets of the are situated primarily in the premium core of the condensate-rich Alberta Triassic Montney fairway and on 35,250 net acres of land featuring four layers of Montney development. The assets represent a 29 per cent increase to NuVista’s current Montney land position.

The acquired business includes 9,600 boe/d of production and significant infrastructure. The acquisition will be funded with NuVista’s expanded credit facilities, a $214 million private placement of subscription receipts  and a concurrent $170 million prospectus offering of subscription receipts.

A syndicate of underwriters led by CIBC Capital Markets, Peters & Co. Limited and RBC Capital Markets have agreed to purchase the financings, which will be offered at a price of $8.10 per subscription receipt for gross proceeds of $384 million. Additionally, NuVista will raise by way of a private placement, up to approximately $35 million in common shares on a flow-through basis in respect of Canadian Development Expenses (CDE) pursuant to the Income Tax Act (Canada) at a price of $9.05 per common share.

Highlights

The assets, according to NuVusta, include high-quality, condensate-rich Montney position in the over-pressured Pipestone area including:

• 35,250 net acres of land, the majority of which is a single contiguous block with four layers of well-delineated development potential;
• 157 million boe gross proved plus probable (P+PA) reserveswith $1.21 billion net present value before Tax discounted at 10 per cent (NPVBT10) booked predominately in only one zone thus far;
• Full-field development production targeting over 50,000 boe/d, generating over $400 million of targeted annual adjusted funds flow and almost $200 million of targeted free adjusted funds flow; and
• Current production of 9,600 boe/d (83 per cent Montney) with a low decline rate estimated to be 22 per cent and associated infrastructure.
• NuVista’s full-field development production line of sight increased from 60,000 boe/d to over 110,000 boe/d, with higher condensate weighting and enhanced free adjusted funds flow per bbl;
• Upon closing, NuVista’s credit facility is expected to be increased to approximately $450 million from $310 million;
• Exposure to an additional 52,800 net acres of non-Montney land with access to existing infrastructure.

Increased 2018 guidance  

The 2018 guidance reflects the inclusion of the acquired business effective July 1. In the fourth quarter of 2018, the company anticipates spending an additional $35 million to accelerate completions on five wells at Bilbo and commence drilling on four wells at Elmworth. With the start-up of the SemCAMS Wapiti gas plant in the first half of 2019, the company expects to have access to an additional 10,000 boe/d of capacity.

Although initial gas volumes from the acquired business will be exposed to AECO pricing, the increased condensate percentage more than makes up for the reduced gas pricing as compared to NuVista’s preexisting gas sales which are largely tied to NYMEX pricing. In the near term, the company expects approximately 40 per cent of total corporate gas sales to be exposed to AECO pricing. As such, approximately 70 per cent of corporate revenues are expected to come from condensate sales, seven per cent of revenues from NGL sales, and approximately 23 per cent of revenues from natural gas sales.

“We will look to diversify markets for natural gas production from the acquired business over time,” the company said.