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Providing coverage of Alaska and northern Canada's oil and gas industry
November 2008

Vol. 13, No. 44 Week of November 02, 2008

EnCana, Nexen on the lookout

EnCana prepared to step up drilling with lower costs; Nexen flush with cash, no plans to look for capital, in position to acquire

Gary Park

For Petroleum News

EnCana and Nexen, two of Canada’s largest oil and gas independents, are doing their utmost to put some shine on a gloomy outlook, figuring they will not only ride out the current financial storms, but could emerge larger than before.

EnCana Chief Executive Officer Randy Eresman said his company is “very well-positioned” to handle the challenges stemming from the collapse of financial markets.”

“Our strategy has positioned us very well to withstand the impact, to adapt and to potentially react,” he said.

The market volatility could open the door to acquisitions, although “at this early, early stage I think it’s more prudent for companies to start trying to understand all of the implications before acting too quickly,” Eresman said.

However, he also said EnCana is prepared to step up its drilling to take advantage of lower costs, although its plans won’t be rolled out until the mid-December release of its 2009 capital spending.

“We’ll be taking a measured approach with an increased focus on capital preservation as appropriate given current market conditions,” he said.

During the second quarter EnCana produced an average 3.9 billion cubic feet per day of gas, up 8 percent from a year earlier, and 133,600 barrels per day of oil, off 2 percent.

Chief Financial Officer Brian Ferguson said 1.6 bcf per day of gas production has been hedged at an average US$9.30 per thousand cubic feet, about one-third more than current prices, propping up a large share of its cash flow. It also has contracts setting a floor price of US$8.65 per thousand cubic feet.

Despite the success of the hedging program, Eresman injected a cautionary note, saying “market conditions have created a great deal of uncertainty for the supply-demand balance in the future.

“We believe it is prudent to be conservative in the short term with our capital program until we get a better understanding about how it will turn out,” he said.

Eresman said EnCana’s hedging “gives us significant protection for cash flow next year. But the unhedged amount is variable and our anticipation is that overall cash flows will be reduced in 2009.”

Given that EnCana has been managing to feed a maximum 90 percent of its cash flow into its capital program, he said that in itself will “cause us to choke back a bit on the amount that we spend out of core capital.”

However, he said EnCana must first complete its analysis over the next two months, which could identify a “great opportunity to increase our drilling.”

Nexen flush with cash

Nexen is flush with cash from earlier high oil prices, has available bank lines of credit, decades before its outstanding bonds come due and no plans to look for more capital, putting it in an ideal position to take advantage of any acquisition opportunities, said Chief Financial Officer Marvin Romanow.

He said Nexen has solid businesses in the North Sea and the Alberta oil sands and is ramping up its spending in British Columbia’s shale gas plays, adding “those are the kinds of places where (the company) might have some choices going forward.”

The company has the first, C$6.1 billion stage of the Long Lake project behind it, although the official launch on Oct. 23, despite blue and red balloons and an array of honored quests, was slightly tarnished by the absence of synthetic crude.

The 50-50 joint-venture with OPTI Canada involves the use of patented technology to convert bitumen into high-grade light synthetic crude, but the gasification phase of the upgrading process has been delayed by at least one month.

Chief Executive Officer Charlie Fischer said he is not distressed by the upgrader hitches.

“The good news is that we aren’t finding any things that are showstoppers. When we chose the day for the launch, we had no idea if we’d have synthetic crude or not and we didn’t care.”

Alberta Energy Minister Mel Knight praised Long Lake’s environmental features, noting it will use salt water from wells and recycle 90 percent, while its new technology will enhance carbon capture and storage.

“This project helps us point the way to the future ... there are great opportunities for energy development — not just hydrocarbons — across this province,” he said.

Husky: costs outpace inflation

Husky Energy, in releasing its third-quarter results, said the global financial crisis “has reduced liquidity in financial markets, restricted access to financing and caused significant volatility in commodity prices.”

“These will impact the performance of the economy going forward. However, companies with strong cash generation from operations, availability of cash and cash equivalents, low debt with long maturities and unused committed credit facilities will be better positioned to manage through this crisis.”

Husky warned that rising costs across the board are outpacing inflation, affecting the cost of operating oil and gas properties, processing plants and refineries, while capital projects are susceptible to cost volatility.






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