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EnCana Says Low Gas Prices 'Here to Stay'

February 15, 2010
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EnCana Corp. is a big believer in the future of North American natural gas but low gas prices "are here to stay...and not likely to again rise to historical levels," CEO Randy Eresman said Thursday.

Speaking with financial analysts about the company's 4Q2009 and year-end results, Eresman was frank about the management team's outlook for gas prices through at least 2012.

"EnCana has, for a number of years, done an exhaustive evaluation of North American natural gas supply," the CEO said. "In our view, with all of the efficiencies created by horizontal drilling and massive hydraulic fracturing, which has been benefiting production, we are seeing that supply can meet demand at a much lower price than historically.

"In our view, natural gas prices at a lower level than historical expectations are here to stay. We are a company that can invest in that environment, and despite the fact that we believe that natural gas prices will not likely rise to historical levels, we will still be able to operate."

Asked about EnCana's mid-cycle pricing expectations, Eresman was candid.

"Even through a significant economic downturn, we were able to perform," Eresman said of 2009. "We believe North American gas prices will be lower than we've seen...but we are positioned very well to capture strong margins and thrive in what we believe will be a competitive environment..

"With every new piece of information we receive, we are more confident of our ability to continually lower supply costs...The wildcard, does inflation at some point kick in? When we reference lower supply costs, we are referring to today's structures at costs that we could never have imagined."

EnCana in late 2009 forecast long-term gas prices to be $6.50/Mcf, with an average price of $5.50/Mcf early in 2010 and rising in 2011 to be on average "$6.60 beyond that," Eresman said (see NGI, Nov. 16, 2009). "We see some coming off of that...it will come down a bit."

Encana has hedged about 60%, or 2 Bcf/d, of its 2010 production at an average New York Mercantile Exchange price of $6.04/Mcf, and it has additional hedges in place for 2011 and 2012.

In addition, as of Jan. 31, EnCana had hedged 935 MMcf/d of expected 2011 gas production at an average price of $6.52/Mcf and about 870 MMcf/d of expected 2012 production at an average price of $6.47 per Mcf.

"Natural gas "has an important role to play for the continent," Eresman said. "There's been a paradigm change in the affordability for natural gas, and EnCana is ready to play a leading role."

EnCana, based in Calgary, became a pure-play North American unconventional gas producer beginning in December after splitting off its integrated oil assets to form Cenovus Energy Inc. (see NGI, Dec. 7, 2009). In EnCana's latest earnings report, the producer issued earnings pro-forma, reflecting performance as if the split-off had occurred before 2009 to clearly differentiate between the two businesses.

Because of lower gas prices, EnCana reported 4Q2009 pro-forma quarterly earnings of $373 million (50 cents/share), which was down by a third from earnings in the year-ago period.

"In a year of significant and widespread economic crisis, our company thrived at the same time that it completed a major corporate transformation into two highly focused energy producers," said Eresman. "While we recognize that the abundance of North American natural gas likely heralds a future of lower and less volatile natural gas prices, our operating practices, leading technologies and increasing efficiencies position us very well to continue to capture strong margins and thrive in a competitive price environment."

Total pro-forma production in the last three months of 2009 was 2.8 Bcf/d, which came in higher than financial analysts' expectations.

Last year gas output was affected by management's decision to "shut in some natural gas wells, restrict productive capacity and delay some well completions or tie-ins to sales pipelines because of lower natural gas prices," EnCana reported.

"These company-wide initiatives resulted in production restrictions of approximately 300 MMcf/d pro forma for 2009. Most of this production is expected to be back on stream by the end of the first quarter of 2010. Total 2009 production was also lower due to about $815 million of net divestitures of noncore assets, which were producing about 2% of EnCana's daily production last year."

The company exited January with gas output approaching 3.1 Bcf/d. As of Jan. 31, it said "about 125 MMcf/d remains shut-in in the Canadian Division." The shut-ins are expected to be back on production by the end of March.

EnCana's emerging plays continued to deliver strong performance in the final quarter and throughout 2009, increasing efficiencies and well performance, and reducing costs on a per-unit basis.

The Cutbank Ridge resource play in northeast British Columbia (BC) saw drilling, completion and tie-in costs for each well in the Montney formation down 11% y/y to $5.8 million, despite an increase to nine from eight in hydraulic fractures. At the Horn River play, also in northeast BC, EnCana is targeting drilling, completion and tie-in costs of $500,000-600,000/completed fracture interval for an average cost of $10-12 million/well.

Overall, 2009 average per well costs fell about a quarter because of improvements in technology, economies of scale and cost deflation, EnCana said.

In the Haynesville Shale play, where EnCana holds a position in both northern Louisiana and East Texas, drilling, completion and tie-in costs dropped about 40%/well in the quarter from a year earlier. In that play EnCana is targeting total well costs of $9 million/well this year. Its focus in the shale "continues to be on land retention and completion optimization" (see related story).

Pro-forma cash flow for the latest quarter was $930 million ($1.24/share), down from $1.5 billion ($2.00/share) a year earlier.

Before price revisions under Securities and Exchange Commission rules, EnCana's proved reserves at year-end 2009 were 12.8 Tcfe. The producer added 1.9 Tcfe of proved reserves, compared to production of 1.1 Tcfe, for a production replacement of 169%. F&D costs were $1.62/Mcfe, down from the three-year cost average of $1.92. The proved reserve life index now stands at about 12 years.

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