Encana Refocuses On Five Plays

In an effort to counterbalance low natural gas prices, Encana Corp. introduced a “bold” new vision and strategy. This strategy is centered on becoming the leading North America resource play company, according to Encana’s president and chief executive Doug Suttles.

Suttles, who took over as the head of Encana in June, said that in order to achieve this goal the company would seek to balance its holdings between liquids and gas by focusing on five core plays: the Montney, the Duvernay, the DJ basin, San Juan basin, and the Tuscaloosa Marine shale. In addition, Encana is planning to spin-off its royalty interests in the Clearwater play in Canada in a initial public offering (IPO).

The company currently holds nearly 600,000 acres in the Montney and plans to spend between $500 million to $600 million of its capital program in the play in 2014. While the Montney is a more mature play, Suttles said that the Duvernay is another world-class play in Canada that is expected to really ramp up in late 2014 and grow rapidly thereafter. Encana has expanded its rig count in the DJ basin from four rigs to five rigs and is continuing to improve its efficiency. The company will also be ramping up its activity in the San Juan basin in 2014 with about $350 million to $450 million diverted towards it. The Tuscaloosa Marine shale is a very new play that the company holds 300,000 acres in the core part of the play. Next year Encana will spend between $200 million to $300 million will assessing the play and running between one and three rigs.

*Does not include carry capital; preliminary numbers, subject to Board approval.

Source: Encana

The Clearwater royalty interest comprises 5.2 million acres that is a legacy asset holding vast potential, according to Suttles. “Our intention is to transfer our fee title interest and associated royalty into an entity that we will separate from the company, run it independently and take it to the public markets by the middle of next year.”

The company is planning to divest non-core assets, specifically gas-focused operations and drilling permits, while also reducing expenses. “We had more gas options in the portfolio than we could reasonably develop. Our capital allocations process needed more discipline and focus [and] we needed to align the organization, both its structure and its scale, with our future business,” he said during a conference call to discuss the strategy.

Encana identified four key goals: 1) being active in both oil and gas along with assets that can increase in scale; 2) improve its use of market intelligence so that its allocation of capital follows commodity price movements; 3) cultivating its operational excellence to improve efficiencies; and 4) use a more disciplined, dynamic and responsive capital allocation plan.

“All of this links together around a strong balance sheet, which we actually think provides competitive advantage through time as it allows us to capture opportunities as they emerge,” he said. “Our focus on generating profitable growth, the core of our strategy, is about concentrating our capital on the most leveraging assets in our portfolio.”

As a result of this strategy, the company will be driving 75% of its capital in 2014 to these five core plays while also cutting its workforce by 20% and consolidating its operations in Calgary and Denver. In addition, Encana will also reset its dividend to 7 cents per share on a quarterly basis with a goal of growing on a compound annual rate of more than 10% over the next four years.

“We believed that we needed to get our cost structures and our efficiencies right … We [also] needed to size our capital program and its distribution appropriately, focusing on the best quality opportunities we have in our portfolio and driving the oil and condensate and liquids-rich opportunities. [As part of this], the dividend must be sustainable through a volatile commodity price environment,” Suttles said.