EnCana Corp. on Thursday mapped out its spending plans for 2007, announcing it will shift to a cruising speed and cut its capital budget by 6% to minimize ongoing high service costs. Capital investments to expand natural gas output and fund its emerging oilsands business will be fueled by internally generated cash flow, supported by hedges on more than half of its forecasted production volumes.

With planned share repurchases this year and next, 2007 natural gas production per share is forecast to increase by 9%, and total oil and gas production is expected to rise 4%. EnCana expects to generate US$1.3-2.1 billion in free cash flow in 2007.

During a conference call Thursday, CEO Randy Eresman said EnCana’s “moderated rate of growth was designed with an emphasis on maximizing project returns.” He said “the past two years have demonstrated in this industry environment it is difficult to achieve high growth due to a lack of ability to find quality goods and services…Overall, we believe this approach will generate significant free cash flow that can be directed to continued share purchases and increased dividends. As always, our efforts will be focused on increasing the underlying value of every EnCana share.”

In response to criticism by one financial analyst who questioned EnCana’s revised corporate strategy, Eresman said the changing strategy was an “evolution” designed to focus on the company’s core competencies, which center on unconventional gas plays.

“Some may argue we should be more aggressive,” he said. Moderate spending will be its plan for now — but that could change. “This is an issue we plan to revisit on ongoing basis.” If costs drop — and Eresman noted there are signs of that happening now — EnCana could ramp up its spending in the coming months. “Our strategy has not changed, and we remain focused on North American gas plays. The lower capital program means we will moderate our activity. We are following the most appropriate action, given the level of industry inefficiencies we are currently experiencing.”

EnCana’s decision to reduce its capital spending is not a complete surprise. In October, the company reduced its North American exploration and production activity through next year, citing softer gas prices and record storage levels (see Daily GPI, Oct. 26). Last month, Eresman said rising costs had forced the company to drill 650 fewer wells this year than previously forecast (see Daily GPI, Nov. 7).

Less money will be spent on land and exploration to “reduce exploration risks and improve efficiency,” said Eresman. However, even with a smaller budget, EnCana’s natural gas production, which represents more than 80% of the company’s total output, is expected to rise about 3% in North America. Total gas sales volumes in the United States are expected to rise 5% year-over-year, to 1,250 MMcf/d from 1,185 MMcf/d, and in Canada, sales are expected to grow 1%, to 2,210 MMcf/d from 2,185 MMcf/d.

Total oil and gas production in 2007 is estimated at 2,820 MMcfe/d. Nine key gas resource plays will represent about 70% of the 2007 gas production, which is estimated at 2,495 MMcf/d. In all, 3,350 new oil and gas wells are planned, all but 75 in gas plays. Nearly half — 1,595 — will be shallow gas wells, and 915 will be coalbed methane. EnCana also plans to drill 280 gas wells in the Piceance Basin and 145 gas wells in the Jonah Field in the Greater Green River Basin. In the Cutbank Ridge leasehold, EnCana will drill 100 gas wells, and 95 more gas wells are planned in the Greater Sierra play. EnCana also is planning to drill 70 gas wells in its Fort Worth leasehold, 45 wells in Bighorn and 30 wells in East Texas.

Oil and natural gas liquids (NGLs) production, excluding volumes from a planned oilsands partnership set to begin with ConocoPhillips in 2007, is expected to decrease about 5%, mostly on the natural decline in mature properties. U.S. production will be down 8%, and in Canada, output will fall 5%.

Overall, EnCana has budgeted US$5.9 billion for its capital investments, down from $6.3 billion this year. Most of the budget is directed toward EnCana’s upstream business, spending $5.1 billion, which is 9% lower than the $5.6 billion this year. Total operating costs are expected to be about a dime higher, at $0.95/Mcf from $0.85 in 2006. U.S. gas operating costs are expected to be up about five cents, to $0.70/Mcf from $0.65, and up about 10 cents in Canada to $0.90/Mcf from $0.80.

“In 2006, our target is to purchase a total of 10% of our outstanding shares and to date we have purchased 9.4%,” said Eresman. “We expect to complete the program by year-end. During 2007, we plan to purchase between 3-5% of the shares outstanding (24-40 million shares) with divestiture proceeds and free cash flow.” So far this year, EnCana has purchased 81 million common shares at an average share price of $49.36.

EnCana’s board of directors also intends to double the quarterly dividend in 2007. Approval of the increase would result in an annual dividend of 80 cents/share.

More than half of EnCana’s expected 2007 natural gas and liquids production has been hedged, including about 1.75 Bcf/d of expected gas production. The hedged gas includes 1.515 Bcf/d under fixed price contracts at an average price of $8.49/Mcf and 240 MMcf/d with put options at a strike price of $6.00/Mcf. In oil, EnCana has about 126,000 b/d of expected 2007 production hedged, including 34,500 b/d under fixed price contracts at an average price of $64.40/bbl, plus put options on 48,500 b/d at a strike price of $65.00/bbl and 43,000 b/d at an average strike price of $44.44/bbl.

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