Encana Begins 2013 With $3.2 Billion, Plans for Haynesville

Despite huge deals that left Encana Corp. (NYSE: ECA) with $3.2 billion in the bank, the Calgary company may be struggling with a weak liquids portfolio, said Bob Brackett, senior analyst for Bernstein Research.

Encana’s hefty balance sheet was due in part to the company's success with signing major agreements with subsidiaries of PetroChina Co. Ltd., Mitsubishi Corp. and Toyota Tsusho Corp. Encana also beat its guidance to investors.

But liquids appear to be a struggle for Encana, and Brackett said that may be the primary motivation for the company’s resurrection of its Haynesville program.

The company said on Feb. 14 that it is resuming activity in the play because of low supply costs.

“Encana expects that the Haynesville will be able to produce solid returns at current natural gas prices,” the company said.

Encana has two rigs running in the play and plans to add three more in 2013.

Encana said that 80% of its 2013 budget will be directed toward light oil and liquids-rich gas plays, while 20% will go to dry gas assets with a low supply cost or those supported by third-party capital.

Encana production results

“We struggle to see any dry gas asset in ECA's portfolio as compellingly economic at its $3.75 per thousand cubic feet (Mcf) outlook,” Brackett said in a February report. “We believe a return to the Haynesville largely reflects ECA's poor liquids portfolio, rather than the quality of its gas assets.”

Encana decreased 2013 production guidance, seeing total liquids volumes of 50-60 thousand barrels per day, down from 60-70, and natural gas between 2.8-3.0 billion cubic feet per day (Bcf/d) down from 2.9-3.1 Bcf.

Encana Highlights

“While we applaud the decrease in natural gas guidance given poor gas returns (and would prefer to see further declines, to be honest), we believe the decreased liquids guidance speaks to initial lofty expectations with ECA's liquids portfolio, which it largely acquired late in the game,” Brackett said.

Brackett said decreased liquids guidance and the return to the Haynesville suggests backtracking on initial enthusiasm on the company's liquids-rich and oil plays.

“Allocating capital to the Haynesville inherently means, to us at least, the company views those three incremental rigs better served drilling for gas than being placed in its liquids plays… which is a wakeup call given ECA's 2013 view of $3.75/mcf gas,” Brackett said.

The company previously has said it would invest $600 million in oil and liquids-rich plays.

“We expect a more balanced operating cash flow stream in 2013 as a result of increased liquids production, and we continue to seek partnerships to further explore the commercial potential of these opportunities,” a company statement said.

Encana executives said in a conference call that rule changes by the Louisiana Office of Conservation allow drilling at cost unit wells with consent of simple majority of owners and units affected by drilling.

The policy change enabled Encana to develop its acreage position with lateral length averaging 7,500 feet and six wells per 960-acre unit. That reduces capital requirements and improves program metrics.

The company has plans to spend about $270 million in its Haynesville assets in 2013.

Jeff Wojahn, executive vice president and president of the USA Division, said in a conference call that the company’s primary decision for reinvesting in Haynesville is due to strong capital efficiency and profitability of the program.

“A large component of our confidence in the program is also related to our previous history and activity, and we recall that Encana embarked on a large land retention program that allowed us to drill wells or required us to drill wells on a per section basis,” Wojahn said in a conference call, according to a Seeking Alpha transcript. “This allowed us to find the best of the best sweet spots in the play. And I feel that Encana is fortunate to have sweet spot of the Haynesville play, and so that puts us in somewhat unique position.”

The company also studied the wells it previously drilled and “what we found was that they were highly efficient and it changed our belief in what kind of supply cost that we can drive in the best part of the play,” Wojahn said.

He said the company is estimating that supply cost will be in that $2.50 range.

“What that means from a profitability point of view is using a flat $3.50 NYMEX price deck that we are able to achieve rates of return of approximately 30%,” he said. “A $4 price deck (would) yield approximately 40% rate of return into project economics. And that type of return would be reflective of what the current NYMEX strength is for 2014.”

In fourth-quarter 2012, Encana averaged 36,200 barrels per day of liquids production and 2.9 Bcf/d of natural gas production. Average natural gas production volumes for the full year were 3.0 Bcf/d, and average liquids production volumes were 31,000 barrels per day, meeting the company's 2012 guidance.