Providing coverage of Alaska and northern Canada's oil and gas industry
January 2016

Vol. 21, No. 1 Week of January 03, 2016

Encana grappling with natural gas

Cuts costs, payroll, tightens focus to 4 areas; waits for Alberta to complete review; focus on discipline, innovation, sustainability


For Petroleum News

There was once a time when Encana seemed untouchable in North America’s natural gas industry.

It blazed a trail in development of shale deposits and delivered 4 billion cubic feet per day of gas into the continental market from plays that were once scorned by its peers because of their reliance on new, largely untested technologies.

The apparently endless horizon stretching across the Calgary-based company’s future, with talk of LNG propelling the sector to unimagined heights, emboldened it to spin off the bulk of its oil and natural gas liquids business into Cenovus Energy.

But that occurred just in time to see natural gas prices spiral down.

In short order it was forced to concede its strategic gamble had failed as it turned to rebuilding its liquids interest, targeting growth from 50,000 barrels per day n 2013 to a projected 250,000 bpd in 2017 - a goal that now seems remote with Encana’s output in the third quarter of 2015 at 140,000 bpd, despite a 30 percent rise year-over-year.

However, Chief Executive Officer Doug Suttles is sticking to the high road, insisting that during the quarter “all aspects of our strategy came together to drive performance and deliver value.”

“Disciplined capital allocation in our core four assets (the Permian and Eagle Ford plays in the U.S. and Duvernay and Montney stakes in Western Canada), combined with fast-paced operational innovation, delivered sustainable performance improvements and grew high-margin, high-returns liquids volumes, which helped offset the quarter-over-quarter impact of lower liquids prices,” he said.

Spending up, but not on gas

That sounded like the Encana of old, with the company tied to bold plans and groundbreaking technology.

Going forward, Encana aims to raise spending in the Permian by US$150 million by speeding up some projects, resulting in overall 2015 capital spending at the upper end of guidance at US$2.2 billion - US$900 million in the Permian, US$550 million-$600 million in Eagle Ford, US$200 million-$250 million in the Duvernay and US$160 million-$175 million in the Montney.

While the corporate thrust shifts to the Texas sector, Encana plans to decelerate its Alberta gas business pending the outcome of the provincial government’s review of royalty rates and climate change policy.

Suttles said his company will push the “pause” button on a gas processing plant in northwestern Alberta until results of the royalty review are made known.

“It’s only prudent to say, ‘We need to know the rules of the game before we start to play’,” Suttles said of that decision, although he is optimistic the New Democratic Party government of Premier Rachel Notley won’t make the local energy industry uncompetitive because it understands “how important the oil and gas sector is to Alberta and Canada.”

Concern about royalties

That confidence aside, he has no intention of making risky investment decisions because any changes to royalties “could be significant enough to change how returns on investments would perform.”

For 2016, the capital program has been set in a range of US$1.5 billion-$1.7 billion - down 25 percent from 2015 - with 95 percent tagged for the four core assets, including 50 percent for the Permian.

Drilling and completion costs are targeted for a 10 percent to 15 percent reduction, plus a more than 10o percent cut in corporate costs.

The budget is described as “highly flexible ... that can be scaled up or down and redirected based on market conditions.”

Production from the “big four” is expected to average 260,000-280,000 boe per day, accounting for 75 percent of the corporate total of 340,000-370,000 boe per day.

Liquids output is projected at 120,000-140,000 bpd and gas at 1.3 billion-1.4 billion cubic feet per day, each reflecting the impact of previously announced and completed divestitures.

Based on US$50 WTI

The spending is based on assumptions of US$50 per barrel for West Texas Intermediate crude and Nymex gas prices of US$2.75 per British thermal unit and will be funded through expected cash flow of US$1 billion-$1.2 billion along with existing credit facilities.

To boost its profitability, Encana said its cost-cutting efforts, started in 2013, have now removed US$300 million in annual costs from the company, while its payroll has been lowered by more than 400 people, with half stemming from the sale of Louisiana and Colorado assets.

However, in the run up to Christmas, Encana said closing the US$900 million Colorado oil and gas sale was being delayed by up to six months, without saying why. The result was an immediate trimming of another 5 percent from its slumping shares.

The deal, announced in October, involves offloading liquids-rich production and 50,000 acres of DJ basin properties - which produce about 23,500 barrels of oil equivalent per day, 63 percent of that from oil and liquids - to Creston Peak Resources, a new company 95 percent owned by the Canada Pension Plan Investment Board and 5 percent by The Broe Group of Denver.

Encana said the effective sale date of last April 1 and material terms of the deal, including price, remain the same.

Board predicts big gas loss

On the gas front, the Conference Board of Canada said the industry will end 2015 by posting its worst collective loss of C$1.5 billion before taxes since 2009, reflecting the fall in gas prices along with related commodities such as propane, butane, pentane and condensate.

Propane is especially troublesome. Many gas producers are now having to pay midstream companies to remove the unwanted volumes, rather than getting paid for the commodity.

Board economist Carlos Murillo said more employment reductions or salary cuts could come in 2016, while producers will follow the oil industry in renegotiated drilling costs, enabling a return to profitability over the next year.

The board reported that decreasing revenues in the near term will “result in a pullback in investment intentions,” with Murillo forecasting that the largest producers - Encana, Enerplus and Tourmaline - will cut their spending by a combined 21 percent in 2016.

Despite this bleak picture, Canada’s biggest pension funds, the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan, say they prefer to engage with fossil fuel companies and advocate for change on climate change issues from within.

They don’t believe that divestment is a useful tool, opting to assess long-term climate risk in their investment decisions.

`We`re much more in the camp of supporting engagement - working with companies, understanding what they are doing, how they are managing these risks, backing them when they are putting things in place,” Teachers’ Senior Vice President Barbara Zvan told the Globe and Mail.

“I don`t think we generally take the activist route. We would rather work privately with engagement,” she said.

Zvan said the Teachers’ fund assesses each transaction on its merits, with a clear eye to long-term risks as the world transitions to a low-carbon economy.

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