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EnCana's East Texas Gains Buoy Gas Output

Buoyed by some "monster" wells in East Texas, EnCana Corp. last week reported a 4% gain in North American natural gas production in the first three months of the year -- even though it drilled almost a quarter fewer wells.

Quarterly net profit rose in 1Q2009 to $962 million ($1.28/share), primarily on $89 million in hedging gains, versus an after-tax loss of $737 million in 1Q2008. Cash flow fell 18% to $1.9 billion ($2.59/share), and operating earnings dropped 9% to $948 million ($1.26). Capital investments, excluding acquisitions and divestitures, were also down, falling 18% to $1.5 billion, and free cash flow was off 19% to $436 million.

The quarterly results were in line with its previous guidance and "achieved during a quarter when benchmark natural gas prices fell about 39% and oil prices were down about 56% compared to the same period in 2008," the company said.

Total natural gas and oil output year/year rose 3% to 4.7 Bcfe -- higher than it had forecast. Total natural gas production, all in North America, rose 4% to 3.87 Bcf/d. In its key resource plays across the United States and Canada, gas production rose 8%; oil jumped 7%. The gains came even though EnCana drilled only 883 net wells, compared with 1,143 net wells in 1Q2008.

The biggest production gains were in East Texas, where gas-weighted output jumped 50% on the continued success of EnCana's Deep Bossier operations. EnCana said it is drilling "prolific" wells in the Amoruso field, where 30-day initial production (IP) rates averaged more than 19 MMcf/d. The Charlene #1 well, completed in January, had an IP rate "in excess" of 50 MMcf/d.

More encouraging news was reported from Haynesville Shale operations, where the company plans to reallocate $290 million from the budgets set in other areas to develop its leasehold, said Jeff Wojan, president of the USA Division.

"With a total capital program of $580 million, we will be drilling about 50 net wells, which will enable us to continue to increase our understanding of the play, further evaluate our lands and retain prospective acreage," Wojan said of the Haynesville leasehold. He was hesitant to say how well EnCana's drilling results have been to date, but indicated they were "in line" with recent reports by some of its competitors.

Petrohawk Energy Corp. and EXCO Resources Inc. separately in December reported ramping up two "monster" wells in the Haynesville Shale (see NGI, Dec. 15, 2008). Questar Corp. in February also reported double-digit IP rates from its shale operations (see NGI, Feb. 16).

The growth across East Texas and northern Louisiana will take more midstream processing and gas transportation, and to accomplish this, EnCana said it has committed to 150 MMcf/d of capacity on the proposed Gulf South Pipeline Co. LP East Texas-to-Mississippi expansion (see NGI, Sept. 15, 2008). EnCana committed another 500 MMcf/d on the proposed Tiger Pipeline, to be built by Energy Transfer Partners LP (see NGI, Feb. 2).

EnCana's leasehold in northeastern British Columbia's Horn River Basin continues to hold the company's interest as well. EnCana, which was one of the first producers in the shale field, said it is using a more efficient way to develop the gas in this emerging shale play by increasing the number of fracture stimulations per long-reach horizontal well leg. EnCana and partner Apache Corp. now expect to increase their fracs/leg to as many as 14 from the originally planned eight fracs.

By increasing the number of fracs, the number of wells could be reduced but production would be about the same, EnCana said. The partners' revised plan is to drill 12 net wells in the Horn River Basin this year, rather than the 20 initially scheduled.

Public consultations also are under way for the proposed Cabin Gas Plant, to be built about 60 kilometers northeast of Fort Nelson, BC (see NGI, March 16; March 2). The proposed plant, in which EnCana holds a 25% stake, would have an initial processing capacity of 400 MMcf/d. Capacity would expand in stages as the basin's output grows. The first phase of the project is set to be commissioned in the second half of 2011.

"With continued economic uncertainty and low prices, particularly for natural gas, we remain focused on directing our capital investment to only our highest-return projects," said CEO Randy Eresman. "For 2009, we set a modest capital program with the flexibility to align investments with the industry conditions. Our North American resource play business model and our conservative investment approach will help EnCana generate strong performance through 2009 and withstand the prevailing economic downturn."

During a conference call with investors last week, the CEO said EnCana could reduce its spending this year if gas prices remain at their current level. Low commodity prices and the recession also have taken off the table plans to split the company, he said. Last May EnCana announced it would split into two separate companies: one as a pure play in unconventional gas and the other as an integrated oil company (see NGI, May 19, 2008).

In any case, EnCana's financial position, said Eresman, "is strong. Our debt ratios remain below our targeted range and we have hedged about two-thirds of our total expected natural gas production through October of this year at an average price of $9.13/Mcf, which is about two and a half times the current spot price. Our hedging strategy is aimed at providing an increased level of certainty to our cash flows so that we can efficiently manage our capital programs."

Industry costs continue to fall, and that may impact this year's spending, said Eresman.

"Within the company...we haven't talked about this, but we have a 10% try to reduce expenditures by 10% lower than they were budgeted," he said. "We've already identified a number of potential savings opportunities in capital operating and general administrative costs. Once we have a better sense, by the end of the second quarter, we'll have more specifics."

In the first three months of 2009, EnCana's operating and administrative costs fell about 31% to $1.06 Mcfe, compared with the same period a year ago, mostly because of a weaker Canadian dollar, lower fuel prices and lower long-term incentive costs, Eresman said.

"Substantially reduced field activity across North America is starting to result in lower supply and services pricing and, by the end of 2009, we anticipate price reductions could reach more than 20% from 2008 average costs, if current trends continue," he said. "So far in 2009 we're tracking lower on capital investment and operating and administrative costs, and by mid-year we expect to know how much this will impact our overall expenditures for 2009."

Including financial hedges, EnCana's realized natural gas prices dropped 10% in 1Q2009 from a year ago to $7.22/Mcf; realized liquids prices decreased 51% to $34.24/bbl. EnCana has hedged about two-thirds, or 2.6 Bcf/d, of expected gas production through October at an average New York Mercantile Exchange equivalent price of $9.13/Mcf.

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