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EnCana shrugs off setbacks, chases lofty goals Driven by CEO’s ‘best in class’ objective, Canadian independent makes gains on most fronts, but hits bump off Canada’s East Coast, calling “time out” on its $1.1 billion Deep Panuke gas project Gary Park PNA Canadian Correspondent
A year after being hatched, EnCana Corp. has found vastly more reasons to celebrate than commiserate. Canada’s biggest independent petroleum producer boasts a market value of about C$30 billion (US$20 billion) and a bulging war chest that has industry observers on the lookout for acquisition targets, despite such talk being downplayed by chief executive officer Gwyn Morgan.
But its first birthday since the merger of Alberta Energy Co. Ltd. and PanCanadian Energy Corp. also yielded a dud in the gift pile, when EnCana called a “time out” on its $1.1 billion Deep Panuke gas project offshore Nova Scotia, saying the known reserves of 935 billion cubic feet make the venture too risky and too expensive.
In the process, it added to a string of setbacks for those who hope the Nova Scotia waters can be a vital part of an East Coast energy frontier as well as a vital new incremental supply source for the U.S. Northeast to bolster the existing Sable field which delivers about 530 million cubic feet per day, but is expected to start a premature decline.
Production likely, but delayed Morgan told a conference call that it is “highly likely” the field will eventually come into production, but also indicated that time could be well beyond the scheduled 2006 start-up.
Confidence in the region wasn’t helped when EnCana, and its 10 percent partner Murphy Oil, announced in mid-January that it was abandoning its first well drilled on Nova Scotia’s deepwater Scotian Shelf after finding “non-commercial quantities” of gas, although the results can remain confidential for two years. That came after last year’s poor results in the basin, when operators abandoned four wells and suspended a fifth for further study — wells that can cost up to C$80 million each.
The semi-submersible Eirik Raude rig has now been moved to the Flemish Pass, another deepwater play offshore Newfoundland, where it will drill two wells for a consortium of EnCana, Petro-Canada and Norsk Hydro Canada Oil & Gas Inc.
EnCana officials told a conference call with analysts Feb. 20 that the rig could return to the general Panuke area later this year and resume the hunt for gas to improve the economics of the play.
They said EnCana’s plans to spend about C$100 million on the East Coast this year remain unaltered, while Morgan said there is no thought of selling the Deep Panuke asset.
Although many have grown weary of Morgan’s “best in class, best in class” mantra, when describing EnCana’s ambitions, and his claims to be “the highest-growth producer in the business,” the track record is less easily dismissed. Significant benchmarks surpassed Since its emergence in January 2002, every significant benchmark of the founding companies has been surpassed by the new entity:
• Total daily sales, on a pro forma basis, climbed 12 percent per common share to 723,000 barrels of oil equivalent per day in 2002 and are forecast to reach between 740,000 and 797,000 barrels this year, including 3 billion to 3.1 billion cubic feet per day of gas and 240,000-280,000 conventional barrels of oil and natural gas liquids per day.
• EnCana added 473 million barrels of oil equivalent of conventional proved reserves in 2002, replacing 190 percent of production and exiting the year at 2.479 million barrels before royalties.
• EnCana has 100 percent ownership of North America’s largest independent gas storage network, with a combined 145 billion cubic feet of capacity and plans to reach 200 billion cubic feet in 2005, including withdrawal capacity of 4 billion cubic feet per day.
• Northern Alberta oil sands production is forecast to make a quantum leap from 22,000 barrels per day in 2002 to 120,000 barrels in 2007.
• Capital spending is budgeted for US$3.2 billion this year, including US$2.24 billion for onshore North America, 77 percent directed to natural gas.
• In Canada alone it led a pack of 470 operators by completing 2,592 wells in 2002, or 16 percent of the total, and completed 3,109 wells internationally.
Nest egg from sales And now, EnCana is building a nest egg from the sales of pipeline and oil sands assets of about C$2.6 billion (US$1.7 billion), while holding unused credit lines of about C$1.8 billion (US$1.2 billion).
On the debt front, EnCana owes about 1.3 times annual cash flow, comfortably below its Canadian rivals — Talisman Energy Inc., Canadian Natural Resources Ltd. and Nexen Inc. — and far less than the average three times debt-to-cash- flow of comparable U.S. companies.
All of which has set off a fresh round of speculation about EnCana’s appetite, given its ability to spend an estimated C$7 billion (US$4.6 billion), on a takeover that could push its daily production past 1 million barrels equivalent.
But some analysts believe that whatever hunger it might have to expand is likely tempered by the prospect of paying premium prices at a time of robust oil and gas values, not to mention Morgan’s commitment, reiterated at a Feb. 5 energy summit by Credit Suisse First Boston, to build shareholder value.
He described himself as a “very patient guy when it comes to acquisitions of other resources.”
Morgan said that regardless of how suitable some assets may appear, EnCana is in no hurry to make deals “because we have so much internal growth.”
He candidly declared that he does not have “a big appetite for going out and buying another big corporation in the foreseeable future.”
In a conference call with analysts Feb. 20, Morgan said he does not consider that EnCana has built up a “war chest” to embark on a buying spree. Its preference is to focus on “tuck in” purchases that provide a natural fit with existing operations.
The emphasis for 2003 and the next several years is to meet a goal of 10 percent growth per common share in conventional oil and gas sales, he said.
Even when he was still heading up Alberta Energy Co., Morgan argued in fall 2001 that he could achieve 15 percent annual production growth through the drill bit, while U.S.-based producers were more motivated to buy assets. Unloading crude lines, oil sands, coalbed What has emerged in the last three months, is EnCana’s determination to take full control of its destiny.
To that end, it has unloaded two crude oil pipelines for C$1.6 billion (US$1.06 billion).
A consortium formed by BC Gas Inc. paid C$1.175 billion (US$776 million) for EnCana’s indirect 100 percent interest in the 1,700-mile, 172,000-barrel-per-day Express system from Alberta to Casper, Wyo., and 150,000-barrel-per-day link to Wood River, Ill.
Inter Pipeline Fund (formerly Koch Pipelines Canada L.P.) paid C$425 million (US$281 million) for EnCana’s Cold Lake pipeline system, which delivers oil sands production in two legs — one with capacity of 235,000 barrels per day and the other with 200,000 barrels.
Earlier this month, EnCana took the first bid step to shed its 15 percent stake in the Syncrude Canada Ltd. oil sands operation, selling 10 percent to Canadian Oil Sands Trust for C$1.07 billion (US$706 million), giving the trust an option to pick up another 3.75 percent for C$417 million (US$275 million) and purchasing for C$16 million (US$10.6 million) a gross overriding royalty on the remaining 1.25 percent Syncrude interest held by Talisman Energy Inc.
At almost the same time, EnCana parted company with Fort Worth-based Quicksilver Resources Inc. and its Canadian unit, MGV Energy Inc., in Canada’s first announced commercial coalbed methane project.
The original joint venture was formed under PanCanadian and has drilled 175 wells in southern Alberta over the past two years.
The split underscores EnCana’s resolve to have control over all aspects of its assets — operatorship, working interests, land positions, cost control and the pace of project development.
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