Canadian natural gas group EnCana Corporation (ECA) will sell its Colorado-based natural gas processing assets to Western Gas Partners, LP (WES) of Texas for $303 million. EnCana will execute the divestiture through its affiliate EnCana Oil & Gas (USA) Inc. The deal is expected to be closed in the in the first quarter of 2011.

The natural gas gathering, processing and transporting company, Western Gas will acquire EnCana’s Fort Lupton processing plant and five gathering systems, including 1,054 miles of pipeline, 18 compressors and other related assets. Located on the northeastern part of Denver, Fort Lupton processes about 84 million cubic feet (mmcf) of natural gas per day.

As a part of the agreement, EnCana will be allowed to extract nearly 3,500 barrels of natural gas liquids per day from the processed natural gas. The deal also includes a long-term contract between the two companies for expansion and development of natural gas in the Denver-Julesburg basin.

This disposition forms a part of EnCana’s strategy of exploring its midstream assets for value maximization. Management aims to optimize utilization of the company’s abundant natural gas resource with the help of long-term competitive fee-for-service agreements with major midstream concerns.

Calgary, Alberta-based EnCana is also looking for potential buyers for its Cabin Gas Plant in northeast British Columbia that is under construction. Currently, the plant is in the early stage of constructing the first phase of development and is slated to become operational in 2012 with a natural gas processing capacity of 400 mmcf per day. Following the completion of the second phase of development, the Horn River located plant will exhibit a total processing capacity of 800 mmcf per day.

We believe that EnCana has a well diversified high quality portfolio of natural gas assets across Canada and the U.S. The company is also characterized by its strong financial health, an active hedging policy and a competitive cost structure.

However, the current unfavorable macro backdrops along with a weak business profile of the company keep us concerned. 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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