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Encana Lifts Capex for Liquids Transition

Encana Corp. is placing a $600 million bet this year that a transition to more oil and liquids-rich production will help sustain the company until natural gas prices strengthen, CEO Randy Eresman said Thursday.

The higher capital expenditures (capex) in 2012 accompany a search for partners to help fund a list of projects across North America's onshore, he said during a company-sponsored investor conference in New York City.

"To transition our portfolio at a meaningful pace in the current natural gas price environment, it's clear that we'll need to invest more than our cash flow for at least the next 18 months," Eresman said.

The Calgary-based operator -- which is the second largest North American natural gas producer after ExxonMobil Corp., and the largest in Canada -- increased its capex for 2012 by $600 million to give it some heft to more than double crude and liquids output by as much as 70,000 b/d in 2013.

However, the company hasn't given up entirely on natural gas. North America could be producing up to 100 Bcf/d by 2020 if all were to go to plan: more industrial use, more transportation, liquefied natural gas exports, etc.

The management team also is encouraged by early signs that North American gas prices could recover to about $4.00/MMBtu, or even higher. by the end of 2012, a 60% increase from current prices. "We are cautiously optimistic" about the gas price recovery by the end of 2012 and into 2013 to levels "above those currently reflected" in the New York Mercantile Exchange gas forward strip, said Encana midstream gas chief Renee Zemljak.

"Natural gas prices are likely bottoming and trending toward long-term sustainable levels." The record level of North American gas storage will be depleted by the end of the year as producers continue to cut back production in the face of record low prices, she said.

Encana is marking up a capex plan for next year that calls for spending up to $5 billion, with cash flow estimated as high as $3.5 billion. The difference in capex and cash flow is to be made up by selling noncore properties and completing joint venture agreements, said Eresman.

Initial reaction to the increased capex, which exceeds cash flow, didn't go over well with investors. Encana's share price, which already has fallen by about 25% in the past year, fell by 8.5% on Thursday ($1.85) to end the day at $19.83 from $21.68 on Wednesday. More than 21 million shares traded hands versus average daily volume of 7.6 million shares.

The operator is continuing to prowl for partners in three of its onshore plays: Alberta's Duvernay formation, the Tuscaloosa Marine Shale in Louisiana and Mississippi, and the Collingwood Shale in Michigan.

Meanwhile, dry natural gas output in the Haynesville Shale in Louisiana, the Greater Sierra in British Columbia and coalbed methane in Alberta will be on the decline over the next few years until gas prices are higher, said Eresman.

Some of the company's gas production declines will be offset by the startup this year of the Deep Panuke project offshore Nova Scotia.

In the meantime, the oil and liquids transition is encouraging, said Eresman.

Encana's original 2012 plan to drill between 40 and 45 wells has been expanded to drill between 115 and 120 wells in 10 plays primarily focused on oil. In 2012 the company now plans to drill 350 liquids and oil wells, with output ranging from 60,000 b/d to 70,000 b/d, about 40% of which is expected to be oil and field condensate.

Annualized natural gas production is expected to remain "near current levels" of about 3 Bcf/d this year and in 2013.

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