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Encana Ready to Seize 'Right Opportunities,' Says Suttles

With restructuring completed and streamlined operations, Encana Corp. could make a play for strategic assets in North America's onshore, CEO Doug Suttles said Wednesday.

There's no hurry, he said during a quarterly conference call from Calgary headquarters. However, the independent plans to "seize the opportunity presented by current marketing conditions to further evaluate our portfolio...We will continue to proactively and prudently manage the company in 2015. In parallel, we will be ready to seize opportunities if they serve the best long term interest of our company."

Suttles said from his experience, and understanding history, "it's the low point in the commodity cycle that are usually the most exciting times. And I can tell you, we are prepared to respond if the right opportunities come along."

A streak of low natural gas prices sent Encana scrambling to more natural gas liquids (NGL) and oil targets a couple of years ago. The move forced the operator to scale back funding 28 onshore opportunities to seven. This year, because of low oil prices, the focus is going to be only four, the No. 1 target, the Permian Basin, as well as the Eagle Ford Shale, and Canada's Montney and Duvernay formations. Even if prices were to improve, the San Juan Basin, Denver-Julesburg and Tuscaloosa Marine Shale won't make the cut.

"Today we are clearly better positioned than a year ago to weather the current weak oil and gas price environment," Suttles said. The company entered 2014  with our new strategy in place, quickly resizing the organization and reducing the workforce by about 25%. Last year about 86% of capital was invested in the seven onshore areas.

As it had announced in December, 80% of 2015 capital still is to focus on the four assets (see Shale Daily, Dec. 16, 2014). However, that capital plan put in place two months ago was based on $70/bbl West Texas Intermediate (WTI) crude oil and $4.00/Mcf New York Mercantile Exchange (Nymex) natural gas. The four plays set for development still offer "good margins," but capital has been reduced by about $700 million to $2-2.2 billion.

"This is based on our revised planning assumption of a $50 WTI oil price and a $3.00 Nymex natural gas price for full-year 2015," Suttles said.The spending plans also are based on an assumption that oilfield service costs should drop by around 15% overall, with some areas seeing much larger reductions.

The lower capital would lead to a company-wide production decline of about 14% from 2014, but the four plays actually would see an increase in output, the CEO said.

"Given our focused capital allocation on our most strategic assets, we anticipate that total production from our Permian, Eagle Ford, Montney and Duvernay assets will increase from an average of 183,000 boe/d in the fourth quarter of 2014 to at least 240,000 boe/d in the fourth quarter of 2015. Even if current low oil and gas prices persist through the end of the decade, these four assets are still capable of profitable, growing production."

During the fourth quarter, NGL production jumped 61% year/year to average 106,400 b/d. NGL output is expected to increase by another 60% this year, averaging 130,000-150,000 b/d. Permian liquids would lead the charge, producing "at least 45,000 boe/d on an annualized basis," Suttles said.

Texas has become an integral part of Encana's growth going forward. Encana grabbed the Permian leasehold in the fall after spending $7 billion to buy Athlon Energy Inc.(see Shale Daily, Sept. 29, 2014). It doubled its Eagle Ford holdings last spring in a $3 billion deal with Freeport McMoRan Inc. (see Shale Daily, May 7, 2014).

The lift from the two big Texas acquisitions helped to increase proved reserves year/year by nearly 150%, CFO Sherri Brillon told analysts. Proved plus probable (2P) oil reserves jumped 360%.

"Reflecting the transition of our asset base to higher margin liquids production, at the end of 2014, crude oil and NGLs increased from 15% to 38% of 2P reserves year/year," Brillon said. The "only negative performance revision" was associated with Deep Panuke, the natural gas project offshore Nova Scotia, where year-end proved reserves declined to around 80 Bcf. As of Tuesday (Feb. 24), Encana had around 1 Bcf/d of expected 2015 gas production hedged at an average of $4.29/Mcf, with around 55,000 b/d of oil volumes hedged at $62.18/bbl.

The focus across the onshore leaseholds is basically the same: improve the rate of return by upping estimated ultimate reserves and reducing oilfield service costs. COO Mike McAllister said in the last several months the company had been "actively and methodically working with our suppliers to reduce cost across the portfolio." In some areas, Encana is seeing cost reductions of more than 50%.

"The Permian is a perfect example of how we're trying to take advantage of the challenging market conditions which our industry is facing," McAllister said. "When we first announced the Athlon acquisition, the market expressed concern on whether or not we would be able to retain staff and get services required to grow the high quality asset. Clearly, current market conditions are helping us. We successfully retained the majority of the Athlon staff and we have been able to attract a number of new, highly talented technical professionals to our Permian team."

Permian spend for 2015 is set at $700 million, with four to six horizontal rigs planned and 55 horizontal net wells to be drilled in the Wolfcamp and Spraberry formations. In addition, 46 vertical rigs are scheduled, consistent with lease obligations.

In the Eagle Ford, where initial production rates ticked up about 25% higher from 2013, the company is assessing the refracture (refrack) potential of more than 100 existing wells, McAllister said. Refracks, which Encana first tested in the Haynesville Shale, cost much less than drilling a new well, with Eagle Ford frack makeovers at about $3 million or less. Sixteen net new wells also are scheduled this year, with total of about 50,000 boe/d on a capital spend of $550 million. Two to three rigs would run through the year.

The Montney delivered 87% year/year liquids growth to 19,000 b/d in 2014, the COO said. "Our teams are now looking to advance completion designs even further by testing larger fractures." The Montney budget this year is set at $245 million, with three rigs drilling about 25 net wells. Production is expected to average 124,000 boe/d net.

In the Duvernay, the development program would focus on the Kaybob and Simonette area, where on average two or three rigs would be running to drill around 15 net wells. Close to $230 million is budgeted, mostly for completions activity.

During the last three months of 2014, Encana's operating profits fell to $35 million (5 cents/share) from year-ago earnings of $226 million (31 cents). Cash flow plunged 44% to $377 million (51 cents) on higher taxes and one-time costs associated with the Athlon transaction. Because of lower oil and gas prices, this year's cash flow is forecast to be $1.4 -1.6 billion.

Tudor, Pickering, Holt & Co. modeled Encana's performance using the company's commodity price guidance and service cost savings expectations. Analysts said they saw a "pathway to cash flow neutrality" with planned asset sales. However, they said a $75.00/bbl oil price and $3.50/Mcf gas price would be "needed to align 2016 cash flow," based on an expected capital spending program of $2.7 billion and 1% year/year growth in production.

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