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Encana Bucks Industry Trend, Boosts Onshore Spending

Encana Corp. plans to spend up to $2.9 billion for upstream development in 2015, with 80% of the capital targeting the Permian Basin, Eagle Ford Shale and the Montney and Duvernay formations in Canada.

The Calgary independent's 2015 capital expenditure (capex) budget is set at $2.7-2.9 billion, about $400 million higher than it had forecast in November. Since it began remapping the business strategy in 2013, exploration targets have been reconfigured to seven from 28, putting the company in better shape than most to weather the downturn in commodity prices, CEO Doug Suttles said during a conference call on Tuesday.

"Following the launch of our new strategy, we took aggressive action and transformed our portfolio, significantly reduced our cost base and built a culture that drives efficiencies throughout our business," he said. "We enter 2015 focused on our long-term strategy, increasing liquids production, capturing new efficiencies throughout the business and protecting our balance sheet."

The prescient strategy shift enabled Encana to hit its planned financial targets in 3Q2014, two years ahead of schedule (see Shale Daily, Nov. 12). With its tighter portfolio and fewer capex targets, Encana should be able to cope with price volatility, Suttles told analysts.

"We're well positioned as the steps we've taken have given us the resilient portfolio, organizational agility and operational expertise needed to thrive throughout the commodity price cycle," he said. "Built into our 2015 plan is the flexibility to respond to the challenges and act on potential opportunities presented in this volatile price environment."

The flexible budget allows Encana to follow the commodity train and cut spending or ramp up as prices dictate, the CEO said.

Encana still remains heavily weighted to gas, but in 2015, three-quarters of cash flow is forecast to be generated from oil and liquids production. Total liquids output should jump by 70% from 2014 to between 140,000 b/d and 160,000 b/d. Overall production is expected to average 405,000-440,000 boe/d. At those levels, total cash flow would be $2.5-2.7 billion, reflecting the impact of higher margin production and continued cost efficiencies, partially offset by anticipated lower commodity prices.

"In 2015, we plan to continue to execute our strategy and capitalize on the portfolio we have built by investing in our highest margin plays and highest impact projects to keep us on track to reach our long-term strategic goals," Suttles said. "Operational excellence will continue to lie at the heart of all we do and we believe the current lower commodity price environment will create opportunities to drive further cost efficiencies throughout the supply chain."

A "prudent" capex program is planned, with no additional debt anticipated, CFO Sherri Brillon told analysts. The 2015 spending plan is based on a West Texas Intermediate (WTI) price of $70/bbl and a New York Mercantile Exchange gas price of $4.00/MMBtu. In addition, about $800 million net also would be generated in 1Q2015 after Encana completes the sale of most of its Clearwater assets and through other transactions, she said.

What gives management confidence in the capex program are the low costs that the big four plays require. The Montney, Duvernay, Eagle Ford and Permian properties have average supply costs of $35-55/boe, which means they still could make money even at low WTI prices, Suttles said. The four plays in 2015 together should contribute about 60% of total output and 70% of total upstream operating cash flow.

In the gas-heavy Montney, which has the potential to produce more than 2 Bcf/d and 50,000 b/d of liquids, plans are to invest $250-350 million in 2015. A two- or three-rig program is planned for drilling 20-30 net wells. An additional $350 million is set aside for Encana's Cutbank Ridge partnership with Mitsubishi Corp., representing a total gross investment in the Montney of $600-700 million. Total liquids production in the play is expected to grow 5% from 2014 to 19,000-20,500 b/d, with gas production averaging 580-620 MMcf/d.

The Duvernay's capex plan is set at $250-350 million, with accelerated development in the Simonette area. Three to five rigs are scheduled to drill 15-25 net wells. Another $800 million would fund Encana's share of a joint venture with Brion Duvernay Gas (formerly named Phoenix Duvernay Gas), representing a gross investment of $1.0-1.2 billion. Net liquids production from Duvernay is expected to jump almost 200% from this year to average 6,000-7,000 b/d.

Encana entered the Eagle Ford earlier this year following a $3.1 billion deal with Freeport-McMoRan Inc. (see Shale Daily, May 7). Plans are to invest $650-700 million in 2015, with three to five rigs and 75-85 net wells. Production is forecast to average 44,000-49,000 b/d.

The Permian Basin, Encana's newest portfolio item, already has become one of its most important assets, Suttles said. Encana entered the play by acquiring Athlon Energy Inc. for $7.1 billion (see Shale Daily, Sept. 29). In the coming year, Encana plans to invest $850-950 million and run nine to 13 rigs. About 180-200 net wells are planned, with projected volumes  of 50,000 boe/d.

Capex also has been set aside for the Denver-Julesburg and San Juan basins, and the Tuscaloosa Marine Shale, but at much smaller levels because the costs of doing business in the plays is higher and margins are lower. Collectively, Encana plans to invest $350-450 million in the assets in 2015, with combined liquids production expected to be 25,000-28,000 b/d. If commodity prices were to break lower than they are currently, the three plays would be the first to see more cuts to spending, Suttles said.

As of Tuesday (Dec. 16), Encana had hedged 1,062 MMcf/d of expected 2015 gas production at an average price of $4.29/Mcf. In addition, 12,300 b/d of expected 2015 oil production had been hedged using WTI fixed price contracts averaging $92.88/bbl.

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