It’s not yet a full-scale pullback to Fortress North America, but the global super-independent that was EnCana’s destiny in 2002 is now emerging as a leaner operation.
Gone, other than the formalities, are British North Sea interests for US$2.1 billion in cash.
Going are assets in Ecuador and the Gulf of Mexico, both areas now deemed to be non-core.
With them, the Calgary-based company will shed about 300 North Sea employees and 600 in Ecuador.
“These combined transactions will focus EnCana as the leading North American natural gas producer and the premier in-situ oil sands developer,” the company said.
Chief Executive Officer Gwyn Morgan told a conference call Oct. 29 that the objective is a strategic realignment of EnCana’s premium-growth, highest-return assets, by sharpening the focus on North American resource plays “where we have a clear competitive advantage.”
In emphatic terms, he said: “It’s not about size, it’s about value.”
In spring 2002, after the blockbuster merger of PanCanadian Energy and Alberta Energy Co., Morgan declared that EnCana would be a company “that can compete with the best in the world, wherever it goes in the world.”
At that time EnCana was exploring in such far-flung regions as the United Arab Emirates, Azerbaijan, Australia and West Africa, in addition to two of its production strongholds, Ecuador and the British North Sea.
Morgan said he was determined to build the strongest, highest-performance globally independent oil and gas company.
“We are not on the kind of treadmill that a lot of our competitors are,” he gushed. “We believe we can have a company whose asset base is the strongest, whose growth curve is the best, whose cost of production is the lowest, whose balance sheet is the best and who operates in countries that are very stable and very sound places to be.”
North Sea included Buzzard
The North Sea holdings included operatorship of the Buzzard oilfield, the region’s biggest find in the past decade, plus major stakes in the Scott and Telford fields, yielding net production of 23,200 barrels of oil equivalent per day from reserves of 129 million boe, and 744,000 exploration acres.
The buyer was EnCana’s cross-town rival and fellow Canadian independent, Nexen, which has bolstered its North Sea output to 80,000 bpd to establish a fourth core area in its portfolio, along with Yemen, the Gulf of Mexico and the Alberta oil sands.
In the process, the Calgary Factor in Buzzard was merely transferred rather than diluted. Nexen now links up with Petro-Canada, which acquired a 30 percent stake in May, although it paid the equivalent of 40 percent less for the properties than Nexen.
EnCana is counting on an after-tax gain from the North Sea deal of better than US$1 billion, which it will channel into debt repayment and buying back shares.
EnCana’s long-term debt was US$8.04 billion on Sept. 30, up almost US$2 billion from the end of 2003, largely the result of its US$2.7 billion takeover of Tom Brown.
Ecuador had lost its luster
The Ecuador interests include 78,100 bpd of production, 162 million barrels of proved reserves and a 36.3 percent stake in a 300-mile pipeline with capacity of 450,000 bpd, but what was once seen as a jewel has lost its luster because of a dispute with the government over valued-added taxes on oil exports and clashes with environmental activists.
Morgan said several parties have shown interest in the assets, which he said pose a greater political risk to EnCana than any of its other operating regions, and a deal is likely in 2005.
Gulf of Mexico stakes include interests in five discoveries and an average 40 percent holding in 224 exploration blocks covering 516,000 net acres, but Morgan said the deepwater is not one of EnCana’s core competencies.
Even when those deals are closed, EnCana will be left with some “small programs” in foreign fields, such as offshore Brazil, Chad,
Oman and Qatar, which Morgan said could “create some upside potential,” but he left no doubt that all will have to pay their way on the same terms as the North American operations.
Against the flow
He said EnCana’s decision to go against the flow by the major Canadian-controlled companies, including Petro-Canada, Nexen, Talisman Energy and Canadian Natural Resources, all of whom are scouting for international opportunities, was based on EnCana’s view that “our international activities became optional.”
“We think we are in the best business — North American natural gas — that you could possibly be in,” he said.
Conventional North American production has entered what Morgan described as a “classic period of increasing costs and accelerating declines. We expect that onshore North America’s future will be dominated by unconventional tight gas and oil sands, which we classify as resource plays.”
That, in turn, requires “unconventional thinking,” Morgan said, noting that in contrast to conventional reservoirs, resource play decline rates and costs typically decrease and cumulative booked reserves increase over time.
He said EnCana, prior to and since its creation, has accumulated North America’s strongest resource play position to become the continent’s No. 1 gas producer.
A key element of the strategy is Morgan’s belief that there will be only one significant addition to imported liquefied natural gas in the next five years, while gas from the Mackenzie Delta is five to six years away and the North Slope is at least 10 years off.
He said EnCana’s North American position is “so strong and so sustainable and the returns are so good” that the company can afford to “go back to our roots … where we can create the greatest value.”
