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Encana sticks to strategy
Gary Park For Petroleum News
It was one of those rare occasions when Encana, a pacesetter in developing its unconventional gas resources that sprawl across North America, found disfavor among its shareholders.
In three straight trading days on the Toronto Stock Exchange, Encana shares were trimmed by a total of nearly 8 percent as investors delivered a sharp rebuke.
They reacted to the company’s reported second-quarter net loss of US$505 million and an operating profit that was short of analysts’ expectations, along with a decision to pump another $500 million into its capital budget ($300 million earmarked for northeastern British Columbia and the rest for the United States) of $4.5 billion at a time when gas prices continue to flounder.
And the outlook is far from cheerful, according to Chris Theal, managing director of oil and gas research at Macquarie Capital Markets, who sees company profitability being squeezed in coming months, posing a challenge for shareholders to “warm up to the market share strategy.”
While saluting Encana for lowering costs at the same time it was increasing production, suggested the weakness on the shares stems from the company’s decision to spend “more aggressively into an oversupplied market.”
Sell recommendation Goldman Sachs has taken an even tougher line, recommending that investors sell their Encana shares, despite the company’s goal of doubling its per-share gas production over the next five years.
Lanny Pendill, an analyst with Edward Jones, in St. Louis, Mo., thought the market reaction was driven by short-term money “that’s not willing to wait for long-term benefits,” arguing that the extra money spent this year by Encana will position the company to produce in later years when prices should be higher.
Encana’s second-quarter cash flow dropped 15 percent from a year earlier to $1.2 billion and operating profit tumbled 80 percent to $81 million.
Chief Executive Officer Randy Eresman acknowledged there could be tough times ahead for gas prices, announcing that Encana has lowered its 2010 forecast to $5 per thousand cubic feet from $5.75.
On the positive side, Encana trimmed its operating cost guidance for 2010 from 90 cents per thousand cubic feet to 80 cents, giving it a 9 percent return on New York Mercantile Exchange prices of $3.85 per million British thermal units.
‘Gas factories’ Sitting on an estimated 18 years of drilling prospects, Encana sees no reason to question its strategy, which is expected to involve “gas factories” that will take a manufacturing approach by drilling, completing and tying in multiple horizontal wells that will be produced from a single surface location, where Encana and its service providers can optimize every part of the process.
Eresman has said Encana believes it is “only scratching the surface of economies of scale that we ultimately expect to achieve. Our gas factory approach will lead to reduced costs, improved efficiencies, further innovation and reduced surface disturbance.”
Its strategy is also linked to joint ventures with Apache, Koreas Gas (which plans to spend C$565 million over the next three years to develop Encana resources) and China National Petroleum Corp., which has signed a memorandum of understanding to negotiate a potential joint venture investment for plays in Horn River, Greater Sierra and Cutbank Ridge in northeastern British Columbia.
Eresman said discussions with CNPC are “developing very well” towards a significant, multiyear partnership.
“The depth and breadth of Encana’s existing portfolio of assets means that at our current development pace of about 1,300 wells per year we would anticipate drilling wells for more than 18 years to access all of our best opportunities,” he said.
“This, we believe, is simply too long for our shareholders to access that value. Our joint venture activity, which has brought us about $4 billion in capital investment over the past three years ... will allow us to accelerate our development timeline.”
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