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EnCana’s Morgan brushes off doubters
Gary Park Petroleum News Calgary correspondent
Resolutely setting itself apart from its peers, EnCana is sticking with its target of 10 percent growth in annual production, as it seeks to capitalize on an increasingly tight North American gas market.
In delivering a 183 percent increase in profits for 2003 and a 12 percent hike in proved reserves from the year, the big Canadian independent is certain it is positioned to “create consistent growth,” Chief Executive Officer Gwyn Morgan said in a conference call Feb. 26.
By focusing on a “very large, wholly owned land position” accumulated over many years by its founding companies (Alberta Energy Co. and PanCanadian Energy) EnCana does not believe “we have to find or buy anything” to grow, he said, emphatic that the company has the pieces in place to achieve “visible, sustainable growth.”
Answering doubts among some analysts that EnCana is digging too deeply into free cash flow to achieve its production goals, Morgan said the company invested $2.5 billion of last year’s cash flow of $4.4 billion in building production and funding long lead time projects. (EnCana reported in US dollars for the first time).
“How much is required to maintain business?” he asked. Analysts concerned spending too aggressive But Lehman Brothers analysts Thomas Driscoll and Philip Skolnick registered concern that the company is “spending too aggressively,” noting that for the final quarter of 2003 it spent $450 million more than cash flow and raised debt by $525 million.
Morgan is untroubled by that talk, insisting the company “built an even stronger asset base (in 2003) from which to deliver top performance over the long haul.
“We have increased the intrinsic value of each EnCana share by growing oil and gas sales by an average 9 percent ...,” he said.
With 203 percent production replacement coming almost entirely through the drill bit, EnCana added 533 million barrels of oil equivalent of proved reserves at a finding, development and acquisition cost of $8.75 per boe. Its operating and administrative costs of $4.11 per boe are among the lowest in the large-cap independent sector, Morgan said.
He said the gas market will remain tight over the next several years and North Americans will have to “make do with flat supply at best” while waiting for relief from liquefied natural gas and the Mackenzie Delta gas project.
Even those who are proposing to import large volumes of LNG say those projects “are as far out as 2008 and 2009” — a period when EnCana is confident it can grow natural gas production in North America and “do it with a cost structure and a resource base that is stronger than our competitors,” he said.
Last year the company boosted its daily gas sales by 8 percent to 2.57 billion cubic feet and by 9 percent in the fourth quarter to 2.68 bcf. Its target for 2004 is 2.7-2.85 bcf. New Colorado pipeline planned U.S. production from the Rocky Mountain region soared 49 percent in 2003 to 588 million cubic feet per day and 654 million in the final quarter, but an on-going regulatory review of plans for infill drilling in Wyoming’s Jonah field is expected to slow the increase to 20 percent this year.
In line with its policy to unlock potential by building on its own properties, EnCana is within days of filing an application with the U.S. Federal Energy Regulatory Commission to build a new pipeline in Colorado with capacity for 1.3 bcf per day for start-up in 2005.
Bill Oliver, EnCana’s midstream and marketing president, said there might be an opportunity for others to join the Entrega pipeline, although EnCana is quite prepared to take the lead to get the project executed.
From its prized British Columbia plays, output last year was 215 million cubic feet per day. Earlier forecasts have targeted 340 million cubic feet from Greater Sierra this year and 400 million in 2005, while Cutbank Ridge, where the company has invested C$500 million, is expected to eventually yield 400 million cubic feet over several years.
The only significant setback to company fortunes occurred during a January deep freeze, which shut in 100 million cubic feet per day.
But the outlook is strong, with 1,200 wells waiting to be tied in after the spring thaw and independent engineers projecting decline rates of 20 percent this year and next, 17 percent in 2006 and 16 percent in 2007 — well below the industry norms, which are currently around 25 percent. Liquids production up for year On the oil front, EnCana saw daily sales of crude and natural gas liquids jump 13 percent to 222,500 barrels in 2003 and surge 32 percent in the fourth quarter to 266,900 barrels, largely due to strong field performance and the recent acquisition of additional interests in the Scott and Telford fields of the United Kingdom central North Sea. The forecast for 2004 is 240,000 to 260,000 barrels per day.
Reluctant to get drawn into predicting gas prices, Morgan was less reticent about oil, suggesting 2004 will be another strong year because “we don’t think a huge downside is likely.”
EnCana’s earnings soared to $2.36 billion on revenues of $10.26 billion in 2003 from $833 million and $7 billion in 2002. Fourth-quarter profits were up 51 percent to $426 million.
Cash flow climbed 67 percent for the year to $4.46 billion and 34 percent in the final quarter to $1.25 billion.
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