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EnCana to Follow 'More Measured, Cautious' Long-Term Growth

Calgary-based EnCana Corp. has cut in half its long-term annual growth target to 5% from 10% through 2007 to free up cash and enable more share buybacks, CEO Randy Eresman said Monday. Eresman also acknowledged EnCana had been poised to spin off C$20 billion of its mature natural gas assets into an energy income trust until the Canadian government last week decided to make the trusts begin paying corporate taxes (see Daily GPI, Nov. 3).

Eresman and his senior management team are taking the company's plans on the road this week. They met with Canadian investors on Monday and plan a meeting in New York on Wednesday. The road show follows an announcement last month that EnCana will reduce its North American exploration and production activity through 2006 and into 2007 because of softer gas prices and record storage levels (see Daily GPI, Oct. 26).

EnCana already has released its least capital-efficient rigs and associated services in North America, a move expected to delay the ramp-up of new production. Rising costs have ramped up the price of drilling, and EnCana expects to drill 650 fewer wells this year than previously forecast.

"Trying to achieve growth of 10% has caused us to be less efficient and some of our projects to be less economic," Eresman said. "It's more prudent for us to reduce our target rate of growth to 5% a year and become more capital efficient." The 5% target is long-term, Eresman noted. EnCana is unlikely to revise it unless market conditions change significantly.

"We'll take a much more measured and cautious approach going forward," he said.

EnCana previously targeted increasing its natural gas volumes by 10% between 2006 and 2009, while projected crude sales volumes would be up between 15-20% in the same period. However, its revised forecast now puts 2006 daily production up about 4% from 2005 to between 4.29-4.36 Bcfe/d, and it expects to sell between 3.6-3.4 Bcf/d of gas this year. Current oil production is 42,000 b/d, but in a joint partnership with ConocoPhillips, EnCana plans to bring on another 350,000 b/d from Alberta's oil sands by 2015. Operating costs are forecast to rise about 16% to a range of C$0.77-0.81/Mcf this year.

EnCana also plans to complete the purchase of 10% of its outstanding shares by year's end, up from 7.1% purchased to date, and to target additional share purchases in 2007 with proceeds from planned divestitures. In addition, "with a significant hedging program in place, we expect substantial free cash flow would be generated that could be used for additional share purchases, debt reduction or increased dividends," said Eresman.

For 2007, more than half of EnCana's expected gas and oil sales are hedged. EnCana has about 1.71 Bcf/d of expected 2007 gas sales hedged, comprised of 1.47 Bcf/d under fixed price contracts at an average price of US$8.46/Mcf and 240 MMcf/d with put options at a strike price of US$6.00/Mcf. In oil, EnCana has about 126,000 b/d of expected 2007 oil sales hedged, comprised of 34,500 b/d at fixed price contracts at an average price of US$64.40/b, plus put options on 48,500 b/d at US$65/b and 43,000 b/d at an average price of US$44.44/b.

Eresman also told investors that EnCana last week scrapped a plan to spin off some of its mature gas assets into an energy income trust after the Canadian government announced the trusts would have to begin paying corporate taxes. Canadian income trusts have paid little taxable income at the corporate level, with most of the income directed to unit holders in monthly distributions.

The Toronto Globe and Mail on Saturday reported EnCana had been set to announce the sizable trust conversion this week after secretly hiring Canadian and U.S. investment bankers to help spin off some of its assets.

"The prospect of EnCana's transformation, on the heels of similar schemes by corporate icons BCE Inc. and Telus Corp., was the final straw for [Canadian] Finance Minister Jim Flaherty," the newspaper reported. "As soon as he became aware of EnCana's plans, he had to act because the fear went beyond EnCana itself: As Mr. Flaherty explained, the biggest lesson of the BCE conversion was that once one major mover converted, others would fall like dominoes."

Flaherty told the newspaper the proposed conversions of BCE and Telus had triggered his decision to tax the trusts. However, "he acknowledged he was aware that 'one or two' other companies of that size were pondering a similar transformation. He singled out the energy industry as a particular source of concern, and the timing of his unexpected announcement suggests Ottawa was aware EnCana was on the verge of converting."

Last Friday, several executives of Canadian energy trusts formed the Coalition of Canadian Energy Trusts to try to dissuade Flaherty from the tax plan. Flaherty said Monday he would be happy to meet with the coalition, but he added it would not change his mind.

"The reason is market certainty," Flaherty told The Globe and Mail. "We are not going to change it."

Interestingly, EnCana founder and former CEO Gwyn Morgan, who retired last month, praised the government for moving to tax the trusts. In an opinion piece for The Globe and Mail, Morgan wrote, "It is fair to say that Canadian directors and management teams have increasingly been faced with shareholders who are demanding to know why their corporations were not converting to a trust. If, as Mr. Flaherty predicts, inaction would have resulted in 'an income-trust economy,' then taking action is certainly in the longer term interest of Canadians."

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