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Encana's Top Five Money Makers Getting Bulk of Budget

Encana Corp., in stress mode since natural gas prices collapsed in 2009, will spend 75% of 2014 capital on only five North American onshore plays, all oily and liquids-rich, a strategy that within four years is designed to create a more evenly balanced operator.

Encana's top five cash-generating assets this year have been the Montney and Duvernay plays in Canada, and the Denver-Julesburg (DJ) and San Juan basins, and the Tuscaloosa Marine Shale (TMS) in the United States. However, Encana has been funding about 30 onshore targets, which means the top five assets have gotten about 40% of the capital.

By moving more funding to the generators in 2014 through 2017, the operator would have a sustainable capital program, with a 10% annual compound average rate of return, CEO Doug Suttles said during a conference call Tuesday.

Since Suttles came aboard in June, the former Anadarko Petroleum Corp. executive has been openly discussing the shift planned and revamping the management team. In 3Q2013 Encana recorded its second consecutive profitable period, with oil and liquids volumes jumping 92% year/year (see Shale Daily, Oct. 24).

Oil and natural gas liquids volumes averaged 58,200 b/d in the third period, and Encana expects to achieve total liquids output this year of 50,000-60,000 b/d. Year-to-date 64% of liquids output is composed of condensate and light oil.

The new strategy is following the volumes, Suttles said.

He detailed why the five plays matter. All five of the oil/liquids-rich formations generate rates of return (ROR) of more than 40%. There's running room and scalability in each one, with a growth potential in every play of at least 50,000 boe/d.

The big five also have the "best rocks," Suttles told analysts. Giving more attention to the assets will allow Encana to diversify its commodities, geography and life cycle, now mostly in tune with producing gas.

The Montney, where Encana has found a lot of gas success in the Cutbank Ridge, straddles British Columbia and Alberta. The liquids portion of the formation has "decades of low-cost inventory," probably 25-plus years, said Suttles.

"We like it because it offers massive running room and scale," with the potential of more than 2 Bcf/d of gas as well as more than 50,000 b/d on Encana land.

The 575,00 net acres in the Montney offer "highly competitive economics," with a 60-100%-plus ROR, including leverage from a partnership carry with Mitsubishi Corp. (see Shale Daily, Feb. 21, 2012). In 2014 the action plan is to accelerate development by investing $500-600 million, or about $700-800 million with the carry. Six to eight rigs would be running.

In the Duvernay, where Encana has 253,000 net acres, there's an estimated total resource of 443 Tcf gas, 11.3 billion bbl liquids and 61.7 billion bbl oil. The play could have 20 rigs running by 2017, said the CEO.

Duvernay "is capable of producing 50,000 boe/d," with a fairway two times the size of the Eagle Ford Shale, 75% weighted to condensate. Encana also has leverage through a joint venture with PetroChina International Ltd. (see Shale Daily, Dec. 17, 2012). Encana holds one-third of the liquids fairway, and once it's in resource play hub mode, it could generate a 100% ROR.

For 2014, plans are to spend $250-300 million ($500-600 million with the carry) and use six to eight rigs to begin pad drilling in the Kaybob field and complete an appraisal of the Willesden Green. Encana also wants to finalize a midstream solution.

The light oil DJ assets, cover 49,000 net acres in the heart of the Wattenberg field of Colorado, is about 70% total liquids, Suttles said. Its economics also are leveraged by third-party capital, with "no market takeaway constraints" and a 55-85% ROR.

Encana plans to pour $15-250 million into DJ next year to develop the leasehold at its maximum efficient rate using four to six rigs.

Encana is a dominant player in San Juan, with 176,000 net acres. The light, sweet oil play is capable of producing 50,000 boe/d for Encana; recent wells have had 30-day initial production rates of 400-500 b/d of oil and cost $4-5 million each, with ROR of 45-70% in the hub mode. In 2014, the assets are to receive a capital commitment of $350-450 million to accelerate commercial development. Two to four rigs will be running.

The emerging TMS, where the company has 302,000 net acres, is a "massive oil resource...ideal for execution at scale." The play has the potential to generate a 40-50% ROR in hub mode and could produce more than 50,000 b/d.

Next year Encana expects to spend $200-300 million in the formation to determine commerciality by year's end, Suttles said. One to three rigs are scheduled.

Another avenue to generate cash flow will be to unlock new value by spinning off the Clearwater assets in Southern Alberta, estimated to be worth as much as $2.5 billion. The 5.2 million net acres extend from the U.S. border to central Alberta.

The Alberta mineral fee title lands could transfer by way of a public offering by the middle of 2014. A "sizable" portion of the cash flow would be distributed to shareholders, including Encana, which would continue to hold a stake.

Encana will retain gas properties outside the primary areas of focus in case prices rise, Suttles said. About one-quarter of the 2014 budget is set aside for all of the other 25 projects in the portfolio, many gas-weighted.

"In essence what we want to do is retain some optionality in our portfolio," Suttles said. “We want to be able to move, depending on market conditions and results, capital around where appropriate."

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