EnCana ahead of growth target, still bucking trends

Natural gas pacesetter critiqued for spending style, faces some bumps in road

Gary Park

Petroleum News Calgary correspondent

Bucking trends is fast becoming a part of the EnCana style, never more so than right now when many of its peers in North America are slashing their natural gas spending and allowing production to slump.

Calgary-based EnCana logged 2.96 billion cubic feet per day in the second quarter and expects to add another 200 million cubic feet per day in the current three months as it targets up to 3.25 billion cubic feet per day by the end of 2003 — well ahead of its 10 percent growth target for the year.

For 2004, the objective for North America is average volumes of 3.25 billion to 3.45 billion cubic feet per day as it cranks up operations in its key regions — Wyoming’s Jonah field and Colorado’s Mamm Creek; northeastern British Columbia; and the Palliser and Suffield plays of southern Alberta.

In contrast, most of its big rivals are floundering. ChevronTexaco has lopped 7 percent off its third-quarter outlook; ExxonMobil’s U.S. production fell 3 percent in the second quarter while Anadarko fell by 6 percent; Shell Canada’s nine-mouth output is off more than 8 percent; and Imperial Oil has declined by 7 percent over the same period.

Not only has EnCana set itself lofty goals, it has kept its reserve decline rates to 15 percent compared with about 25 percent for most of the industry, thus generating more discretionary cash flow for investment, said chief operating officer Randy Eresman.

But, for all the superlatives uttered by chief executive officer Gwyn Morgan, there are some blemishes that were captured by Lehman Brothers analysts Thomas Driscoll and Philip Skolnick.

In an Oct. 28 report, they cautioned that regardless of EnCana’s assets and investment opportunities, the company is “perhaps spending too aggressively and diluting its potential returns as a result.”

The analysts noted that third-quarter Canadian gas production was down about 1 percent from a year ago, suggesting EnCana might fail to achieve the low end of its 2003 Canadian target, although stronger U.S. volumes could offset the shortfall.

Like rival companies, EnCana is also scaling down its conventional oil and gas activity in the aging Western Canada Sedimentary Basin.

Shift to less risky plays

For Western Canada, EnCana plans to contain its conventional exploration “which is generally accepted to be chasing smaller and smaller pools” and put the emphasis on its land base in southern Alberta and northeastern British Columbia.

Lehman Brothers noted that EnCana raised its 2003 capital budget by C$400 million-$900 million from its previous budget, but failed to raise production targets.

Gross capital spending in 2004 is expected to range from C$5.8 billion to C$6.7 billion, while divesting C$500 million to C$1 billion in assets, which Morgan said fetch great prices from income trusts.

Also on the horizon is a possible cash tax bill of C$800 million to C$1 billion in 2004, compared with this year’s C$75 million to C$135 million, stemming from a deferral of C$400 million-C$500 million this year following the merger of PanCanadian Energy and Alberta Energy Co. in 2002. That hit could be a major setback to cash flow per share.

Drilled more than 1,800 wells and kill the other subhead on that page

Its most startling coup recently culminated in the company rounding up 500,000 net acres in the Cutbank Ridge area of the British Columbia foothills, which it puts in the same category as Greater Sierra in British Columbia and its other strongholds in North America.

The expectation is that Cutbank will generate several hundred million cubic feet per day in coming years, delivering profitable, long-life growth.

It also bolsters the company belief that beyond its proved and risked probably booked reserves, its existing land holdings contain unbooked resource potential of 11 trillion cubic feet of gas and 650 million barrels of oil, which it plans to convert to reserves over the next five years.

Following 80 summer wells, the Greater Sierra project is forecast to reach 300 million cubic feet per day by year’s end and 400 million by the second quarter of 2004 once a new pipeline is tied into the Alberta gas transmission system.

EnCana executives are equally bullish about the U.S. Rocky Mountain region, now that Jonah and Mamm Creek are flowing more than 800 million cubic feet per day, with third quarter sales up 38 percent from a year earlier.

EnCana raises hopes for Deep Panuke

Gary Park

Petroleum News Calgary correspondent

Almost nine months after shelving the C$1 billion scheme, EnCana has dropped some teasing hints about the project’s chances of survival, but for various reasons, including its exploration partnership with ExxonMobil and Shell Canada, it is keeping tight lipped.

Two exploration wells have recently been completed in the Deep Panuke reservoir — EnCana’s wholly owned Margaree well and MarCoh, owned 51 percent by ExxonMobil and 24.5 percent each by EnCana and Shell Canada — with what EnCana describes as encouraging results.

In fact, rumors have been circulating in the industry that a separate structure may have been found at Deep Panuke — a prospect EnCana refuses to discuss.

The data gathered is still being analyzed as the big Canadian independent prepares to update federal and provincial regulators Dec. 10 on the status of the project, which was supposed to have come on stream in 2006 at 400 million cubic feet per day.

But with reserves at a marginal 935 billion cubic feet and other factors dragging on the project, EnCana called a time out earlier this year to seek ways of strengthening the anticipated economics of field development and expediting regulatory approvals.

Chief Operating Officer Randy Eresman said it is “still too early to know precisely how development of this promising field may unfold. However, we are certainly encouraged by the additional drilling, which increases our confidence in the size of the reserve and the development potential at Deep Panuke.”

Beyond that EnCana won’t offer even a hint that the reserves are at the economic threshold.

For the Nova Scotia government and industry, battered by a series of drilling failures, a positive verdict is being portrayed by some as make-or-break for the new frontier at a time of growing uncertainty over future investment in the region.

The pioneering Sable Offshore Energy Project is showing signs of stumbling, less than four years after coming on stream and peaking at about 510 million cubic feet per day.

But Shell Canada, a 31.8 percent partner, reduced its own Sable reserve estimates in January by 90 billion cubic feet to 700 bcf and reclassified 200 bcf of “proven developed” reserves as “proven undeveloped.”

Plagued by production problems, Shell has seen its own share of output drop this year top 130 million cubic feet per day in the third quarter from 164 million a year earlier, indicating that overall volumes are below 400 million cubic feet per day.

However, successful well workovers and progress on Tier II fields are supposed to start restoring output over the next year.