Encana Corp.'s latest quarterly profits took it on the chin because of low natural gas prices, but the Calgary producer is responding with a realignment by transferring proven gas shale technology to liquids plays, advertising for partners to share costs in gassy northeast British Columbia (BC), and quietly acquiring an oily leasehold in Alberta's Duvernay Shale.
Long one of North America's leading onshore gas producers, Encana has bowed to reality, CEO Randy Eresman told financial analysts during a conference call Wednesday. The company, which a year ago was planning to double its gassy output based on forecasts of a solid economic recovery, now is modeling on expectations that long-term New York Mercantile Exchange gas prices will be $6/Mcf. It plans to redirect up to $1 billion of its capital spending this year from dry gas to natural gas liquids (NGL) and oil plays, he said.
The transition will be easier than it may appear, Eresman said. The company already has a solid 1.7 million net acres in unconventional basins across Canada and the United States, and Encana will take its proven unconventional gas drilling technology to pump up wetter reserves.
"We have seen that technology that was used in shale gas plays, that has been applied to more liquids-rich plays, areas of shale gas plays, appears to be working quite well," Eresman said. "We were a little bit cautious at first, but with our land position, we do not have to buy...from scratch. We have optimism that we can apply the same technology that we have used for natural gas."
Ironically, it was less than two years ago that Encana shifted to become a pure play gas producer by splitting off its integrated operations into Cenovus Energy Inc., which claimed the oilsands business and most of the integrated oil assets (see Daily GPI, Nov. 30, 2009). However, Encana was left with most of the land, and a lot of it contains liquids and oil, particularly in parts of Canada, where the bulk of the redirected spending will go.
Encana's "liquids-prone" lands extend from Canada's Montney Shale into the Niobrara Shale of the Denver-Julesburg (DJ) Basin, on into the Mancos and Collingwood shales, Eresman noted. In recent months Encana also has assembled close to 190,000 net acres in the Simonette and Kaybob areas of the Duvernay Shale in Alberta, adding to its existing 380,000 net acres of liquids-rich lands in the Alberta Deep Basin and 495,000 net acres in the Montney in Alberta and British Columbia. Costs were not disclosed.
In Colorado Encana holds about 240,000 net acres in the Piceance and DJ basins, where the company has identified liquids potential in the Niobrara and Mancos shales. This year Encana also plans to expand evaluation drilling on its 425,000 net acres in the Collingwood Shale in Michigan.
"Initial drilling results and indications in each of these highly prospective formations show promise as we step up our evaluation and identification of the liquids potential," said the Encana chief. "Our multi-pronged approach to boosting liquids production from our liquids-rich assets has the potential, over the next few years, to deliver substantial volumes of NGL production."
Encana remains open to bringing aboard joint venture (JV) partners, particularly in its gas plays, to share the costs. Earlier this year the company agreed to sell a half-stake of the gas-heavy Cutbank Ridge assets in Alberta and BC to PetroChina International Ltd. for $5.4 billion (see Shale Daily, Feb. 11).
Additional JV partners may be taken on for "selected assets" in BC's Horn River Basin, where a farm-in agreement already is in place with Korea Gas Corp. on a portion of the acreage. In addition, Encana could partner or even sell "a portion" of its producing Greater Sierra lands, Eresman told analysts. RBC Capital Markets and Jefferies & Co. Inc. have been retained to conduct the potential deals.
"As Encana continues to sharpen its focus on resource plays, a greater proportion of total production is included in its key resource plays -- the core value creation assets in the company's portfolio," said Eresman. "As a result, Encana has realigned the producing assets contained in some of its resource plays and the most noted adjustment is the merger of the East Texas and Fort Worth resource plays into the Texas resource play. Other adjustments have been made to reflect additional incremental realignment of Encana's key resource plays, which now make up about 97% of the company's total production."
Activity in the Haynesville Shale also is undergoing a transition to "expedite natural gas development and optimize efficiencies by enabling the drilling of numerous horizontal wells, each containing multiple completion stages, from a single pad location, which results in a lower environmental impact," said Eresman. As it shifts its focus from lease retention drilling to optimizing its drilling program, Encana is seeking regulatory approvals to drill longer laterals in the Haynesville.
"In the first quarter of 2011, the shift to resource play hub activity resulted in about a 25% reduction in drilling costs from a lease retention program. Further cost reductions are expected through the deployment this year of fit-for-purpose pumping equipment and service supply agreements."