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EXPLORERS USA 2005: EnCana in pursuit of the ‘big thing’ Morgan forsakes diversification, steers company to Rocky Mountain resource plays where ‘you find what you look for’ and limit risk Gary Park Petroleum News Calgary Correspondent
The dream of creating a “global super-independent” didn’t survive three years for EnCana, following its creation from the merger of PanCanadian Energy and Alberta Energy Co.
It has been scrapped in favor of a lock-stock-and-barrel pursuit of “resource” natural gas plays, or what Chief Executive Officer Gwyn Morgan calls the “big thing” that will be the cornerstone of giving EnCana a “clear and sustainable competitive advantage” over its North American peers.
Backed by proved reserves and unbooked resource potential of 26 trillion cubic feet and having averaged 3.1 billion cubic feet per day to pass BP in 2004 as the continent’s largest gas producer, he has no doubt that EnCana is now the “bellwether North American natural gas investment.”
At one time, Morgan was brimming with global ambitions, and hell bent on building a company “whose asset base is the strongest, whose growth curve is the best, whose 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.”
In truth, not much has changed in that strategy, except for the conversion that occurred somewhere along the road to worldwide recognition.
At one point, EnCana, in addition to its home base in Western Canada, had a basketful of global prospects in the United Arab Emirates, Azerbaijan, Australia, Brazil, Chad, Oman, Qatar, Ecuador, Greenland and the British North Sea, as well as the Gulf of Mexico and Canada’s East Coast offshore. North America plays the focus Then Morgan stunned the industry by taking EnCana in a radically new direction, dumping the conventional elements of his operation to chase the “resource” plays of North America’s gas sector that stretch along the Rocky Mountain fairway from northeastern British Columbia through Alberta, Colorado and Wyoming into northern Texas.
Add to that the in-situ oil sands opportunities of Alberta where techniques such as steam injection, solvent injection and firefloods are employed to recover deeply buried bitumen.
That remaking of EnCana has generated $6.5 billion from the sale of non-core conventional assets in the last three years, including the $2.1 billion disposal of North Sea interests to Nexen, and is expected to reap another $3 billion this year from previously announced plans to bail out of Ecuador, the Gulf of Mexico and conventional properties in Canada.
Even with those divestitures, the company is counting on a 14 percent growth in gas output this year. International growth optional Morgan told a FirstEnergy Capital conference in March 2005 that other assets outside North America will also be shed because “none of it is needed for our production growth.”
“The bottom line is that as we continued to succeed domestically, it became evident to us that our need for international growth was what we’d call optional,” he said, although the 2005 international budget contains $80 million for unspecified “exploration work” in Chad, Brazil, Greenland, Qatar and Oman.
Once the shake-out is completed, EnCana will be on a path that sidesteps the gambles of traditional wildcatting, which Morgan believes has most of the North American industry caught in a trap of spiraling costs and shrinking production and is forcing companies to go abroad.
With no immediate prospect of gas relief from the Arctic or liquefied natural gas, he says unconventional resources are the “only means of offsetting” the loss of supply since output peaked a couple of years ago. Deep tight reservoirs the goal Morgan, in spurning the current scramble to exploit what is left of the shallow gas prospects in southern Alberta and Saskatchewan, is moving EnCana to Rocky Mountain reservoirs that lie in pools as deep as 16,000 feet and, once brought on stream, can have life spans in the order of 30 years.
But it’s far from a simple leap. The “tight” reservoirs, largely ignored through years of low gas prices, are spread over wide areas, requiring heavy spending on land.
Although the hot spots can be pinpointed with 3-D seismic, they pose considerable technical challenges, including fracturing of rock to keep gas flowing, and thousands of wells to unlock the full potential.
Tackling “resource” plays has been likened to a manufacturing enterprise, similar to the mining that has turned the oil sands into a commercial business.
The EnCana “resource play formula” includes: Focused exploration where “you find what you look for;” cracking the technical nut; controlling land and infrastructure, risk mitigation by engaging external stakeholders; large scale, repeatable manufacturing style developments; and continuous improvement by learning from past experience.
Developing the plays costs about $3 per thousand cubic feet, but low decline rates of about 5 percent a year — compared with current rates of 20-30 percent for conventional gas — free operators from the treadmill of constantly having to replace production. Company adding reserves The latest report card on Morgan’s Mandate showed that once acquisitions were factored in EnCana added 3.1 tcf of proved reserves in 2004 and produced only 1.1 tcf.
Through acquisitions of 2.2 tcf and drill bit additions of 900 billion cubic feet “we have grown the underlying value of the company and net asset value of each share (28 percent in 2004),” Morgan said.
Betting the farm on the Rocky Mountains is something of a self-fulfilling prophecy for Morgan, who staked his claims on the region while chief executive officer of Alberta Energy.
With the turn off the century, Alberta Energy plunged into Wyoming and California by acquiring McMurry Oil and Ballard Petroleum. Once EnCana was launched the accumulation of Rocky Mountain assets turned aggressive with asset purchases and takeovers involving El Paso, Williams Cos. and last year’s blockbuster $2.7 billion takeover of Tom Brown.
Those deals translated into 727 million cubic feet per day of production from the Jonah, Piceance, Fort Worth and East Texas plays and 406 net wells.
The target for 2005 is about 1.18 billion cubic feet per day and capital spending of about $1.5 billion.
While paying a 24 percent per-share premium to acquire Tom Brown, Morgan urged the critics to look beyond the existing proved reserves to “recognize the substantial, long-life resource potential of the assets.” $10 billion could be spent in Rockies In building a Denver-based empire in the United States, EnCana is talking about spending $10 billion over the next decade and adding about 200 employees a year to current staff of about 1,000 — a ringing endorsement of the Rocky Mountains.
The Jonah fields in southwestern Wyoming could see 2,000 wells and $4 billion of capital spending in the next 10 years, while the Piceance basin could get similar attention as the Canadian independent explores its 5 million acres of U.S. holdings, although those plans hinge on Bureau of Land Management approvals which EnCana worries are taking too long.
The refrain is similar in the Greater Sierra and Cutbank Ridge plays of northeastern British Columbia, where the company drilled 237 net wells in 2004 and averaged output of 270 million cubic feet per day.
EnCana is also setting a cracking pace in southern Alberta’s coalbed methane fields, drilling 577 net wells last year and planning about 1,000 this year to boost output from 17 million cubic feet per day in 2004 to 60 million.
While seeing little long-term future in southern Alberta’s shallow gas, EnCana still reaped 592 million cubic feet per day in 2004 from a region that will be a key part of its 2005 sales guidance of 2.25 billion cubic feet per day from Canada and a valuable contributor to the bottom line because the play is a royalty-free area that PanCanadian inherited from its parent Canadian Pacific Railway.
Since Morgan is not prone to waver or wobble, it’s left to others to fret over strategies that involved a heavy gamble on the resource plays and a rising debt level, some of which has eased as EnCana has virtually ruled out any major acquisitions and said it will consider selling assets in a strong Canadian market.
In an apparent tip of the cap to his critics, Morgan keeps emphasizing that “it’s not about size, it’s about value.”
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