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Encana Shareholders Vote No on Lower Production Forecast

Encana Corp. shares fell almost 6% on Wednesday after the natural gas-weighted operator said production in the first six months of 2014 will decline as it restructures to produce more natural gas liquids and oil output.

At the closing bell, almost 12 million shares had changed hands on the day, more than twice the daily average. The Calgary stock closed down $1.11 at $18.11, 5.77% lower.

Most of the news that CEO Doug Suttles and his management team delivered during a conference call already had been heard by investors and analysts in November. At that time, the CEO said going into 2014, Encana would focus on only five plays in the North American onshore, three in the United States and two in Canada (see Shale Daily, Nov. 5).

Encana's top five cash-generating assets this year have been the Montney and Duvernay plays in Canada, and in the United States, the Denver-Julesburg and San Juan basins and the Tuscaloosa Marine Shale (TMS). Encana has been funding about 30 onshore targets, many gassy, but most of those have been shelved until prices are consistently higher.

Encana remains the top natural gas producer in Canada, as well as in the Lower 48, but the pull of higher prices has sent the management team reeling this year, with the departure of CEO Randy Eresman to the shake-up of the operating team.

The weedy part of the gas-to-liquids transition, which takes most of the money from producing plays and puts it into only five, is going to lower total output through at least the first half of 2014. Suttles said it was a three-year plan that would take time to evolve.

"We have stopped funding a number of liquids plays which are not part of our five core growth," he said. "This obviously means that those areas will decline instead of grow. And then as we move our capital and focus it into five core growth areas, which are liquids-rich that has some lag effect..." Production will start "to build rapidly beginning in the third quarter of 2014."

Companywide output "is guided to decline slightly in the first half of the year," but "we expect to see measurable improvements in our cost structure and our margins during the first half of 2014." Through 2017, Encana expects to generate more than 10% compound annual growth rate and cash flow per share by focusing on high margin areas.

Suttles acknowledged that he'd heard "many comments from investors that 2014 is a transition year and that the excitement doesn't show up beyond this year. I would actually disagree with that comment. It's an example of portfolio transition in our five core growth assets. We expect to generate approximately 45% of our pre-hedge upstream operating cash flow even though they entail only 25% of our production."

The five growth assets should deliver 90% of liquids production growth and 30% of total output to 2017, said the CEO. And there would be less spending because drilling efficiencies are rising, he added.

"We expect to invest between $2.4 billion and $2.5 billion" in 2014, which is about 10% less than in 2013. Guidance is structured around the same commodity prices as this year, $3.75/Mcf New York Mercantile Exchange and $95 West Texas Intermediate.

The big prize, by the end of 2014, will be growth in total liquids production, which Encana is forecasting will be 70,000-75,000 b/d.

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