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EnCana Sets Flexible Plan for 2009, Cuts Colorado Capex

Pointing to the uncertain economic times, EnCana Corp. pared next year's budget by 18% over this year's levels and said it would pursue a "conservative, prudent and flexible" program that would keep natural gas levels flat compared with this year. The company also delayed plans to split into two independent companies "until the uncertain financial markets stabilize."

EnCana designed next year's capital plan with flexibility, CEO Randy Eresman told energy analysts during a conference call Thursday.

"This has been a year of extremes in the economy, in financial markets and in commodity prices," Eresman said. "The market is deteriorating to a degree very few could have predicted, which has impacted countless people across the globe...Some things we can't control, and some things we can."

To provide some wiggle room, management could adjust spending by $500 million up or down, depending on how economic circumstances unfold. At the mid-point of the forecasted range, EnCana would invest about $6.1 billion in 2009, which in turn would generate around $7.7 billion in cash flow and $1.6 billion in free cash flow. Cash flow also could be increased if EnCana were to sell some of its assets, said Eresman.

"The spending level is really based on the uncertainty in the market," he said. "We think it is prudent at this time to reduce our overall debt position. If we really knew how long this thing [financial crisis] was going to last," EnCana might budget for more spending now. "But it's too early to be making any bold capital moves. Our view is, with the downturn in the market, it is much better to be conservative until we understand how it's going to unfold."

The Calgary-based producer's business model, which focuses on "low-risk, long-life and low-cost resource plays" in North America "positions us very well to deal with the current market uncertainty," said Eresman. "We have considerable flexibility in our capital programs, providing us with an opportunity to apply an even higher level of scrutiny to our investment decisions as we move through 2009. Optimizing project returns and long-term value creation will continue to be the focus of all of our investment decisions."

At Denver-based subsidiary EnCana Oil & Gas (USA), which operates in Colorado's Piceance and Denver-Julesburg Basin, the company plans to cut spending by 43%, to $400 million from $700 million in 2008. The number of rigs operating in the state is expected to fall to around seven, down from 15 this year.

Some of the spending cuts are said to be related to the new drilling rules approved by the Colorado Oil & Gas Commission last week (see related story).

Depending on the market, EnCana also may sell $500 million to $1 billion of noncore assets. However, Eresman did not detail which assets tentatively could be for sale.

"If prices are weak in 2009, we expect to invest less and sell fewer noncore assets, resulting in free cash flow at the lower end of the forecast range," said Eresman. "If prices strengthen, we expect to invest more and sell more noncore properties, resulting in free cash flow at the higher end of the forecast range."

EnCana also indefinitely delayed plans to split the company, but it still will be working internally to eventually divide the company into an integrated oil company to be named Cenovus Energy Inc. and a pure-play natural gas company, which would retain the EnCana name (see NGI, Oct. 20).

Overall, EnCana's 2009 plan includes spending $4.5 billion, or 60% of its forecasted 2009 cash flow, to maintain natural gas and oil production at 2008 levels, "with investment directed primarily at its key resource plays." About $1.6 billion would be set aside for long-term production and refining assets, including its plans to build the Coker and Refinery Expansion project at the Wood River, IL, refinery, expansions of upstream oil projects in northeast Alberta, development of the Deep Panuke natural gas project offshore Nova Scotia and other long-term upstream projects that offer future growth potential.

EnCana's balance sheet remains strong, said Eresman. At the end of November, about 82% of EnCana's outstanding debt was composed of long-term, fixed-rate debt with an average remaining term of more than 14 years. Long-term debt maturities in 2009 are $250 million, and it has $200 million that matures in 2010. In addition, EnCana had $2.6 billion in unused credit facilities at the end of last month. The producer is targeting a net debt to capitalization ratio of between 30% and 40% and a net debt to adjusted earnings multiple, on a trailing 12-month basis, of one to two times. EnCana's net debt to capitalization ratio is projected to be 28% at the end of 2008.

Two-thirds of EnCana's expected gas production is hedged from January to October. About 2.6 Bcf/d of expected gas production in the first 10 months of 2009 is hedged at an average New York Mercantile Exchange (Nymex) equivalent price of about $9.13/Mcf. EnCana also hedged 100% of its expected U.S. Rockies basis exposure through 2011 using a combination of downstream transportation and basis hedges, including some hedges that are based on a percentage of Nymex prices and some hedges that move basis risk to alternative markets downstream.

To reflect the "dramatically" lower oil prices in 4Q2008, EnCana now anticipates 2008 cash flow range will range between $9.4 billion and $9.6 billion, or $12.50-12.80/share. The changing market conditions also reduced EnCana's operating and administrative cost guidance, which is posted at www.encana.com.

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