Encana Corp. is exploring opportunities to bring more partners aboard to participate in "selective" joint ventures (JV) in North America, which would allow the company to double gas-weighted production over the next five years, CEO Randy Eresman said Thursday.
Late Wednesday the Calgary producer agreed to a $5.4 billion deal with an affiliate of PetroChina International Ltd. to accelerate development in the Cutbank Ridge properties, which straddle British Columbia and Alberta (see Daily GPI, Feb. 10). The deal, in the works for nine months, is a "major step forward" to execute a plan to attract third-party capital, said the CEO.
Encana wants to attract $1-2 billion a year in investment capital to accelerate "our enormous resource potential," Eresman said during a conference call with financial analysts. The PetroChina cooperation agreement is a big step forward for 2011, he said.
"In addition to this arrangement, we have also initiated processes in Canada and the U.S. to explore other potential opportunities that could result in Encana entering into selective joint ventures in the future," said the CEO. Where, exactly, he wouldn't disclose. However, like other gas-weighted producers, Encana has struggled to overcome low gas prices.
Already this year Encana agreed to sell its Fort Lupton, CO, natural gas processing plant and gathering systems to a subsidiary of Western Gas Partners LP for $303 million (see Daily GPI, Jan. 19). It also has requested proposals from companies interested in buying and completing construction of the Cabin Gas Plant, which would serve Horn River Shale producers in northeast British Columbia..
The gas price environment has led Encana's management team to adopt a "conservative approach to investment," Eresman explained. The company plans to sell up to $1 billion of noncore properties this year, $300 million by the end of March. That figure would be above asset sales of $883 million in 2010.
It's not only selling properties, said the CEO. Encana last year also bought more than $730 million of assets in undisclosed areas, spending $592 million in Canada and $141 million in the Lower 48.
"As a natural gas producer it's difficult to feel excited" in the current gas price environment, Eresman said. However, the company still achieved double-digit production growth, up 15% in 4Q2010 from the year-ago quarter and 19% higher year/year.
Still, "at $4.40/Mcf Nymex [New York Mercantile Exchange], prices were the biggest challenge facing gas producers in 2010."
With gas prices low, the company is adding more liquids and oil output to the mix. Last year it bought property in the oily Duvernay Shale of Alberta and the liquids-rich Piceance and Denver-Julesburg basins of Colorado. Still, gas is the future, said the CEO.
In 2011 "much of our delineation drilling activity will occur in liquids-rich plays where we have established land positions," he said. Reducing costs and improving efficiency also are at the top of the list. Although last year's investments "achieved a very competitive supply cost of about $4/Mcf, all of our teams are now focused on a goal to lower this supply cost to about $3/Mcf based on 2010 cost structures, over the next three to five years."
Also on the board for start up this year is the long-awaited Deep Panuke natural gas field offshore Nova Scotia, said Canadian Division chief Mike Graham. Total capital costs for the Deep Panuke project are expected to be higher than budgeted, at $960 million, with almost $100 million allocated this year. Initial production is estimated at 250 MMcf/d, which could go to 300 MMcf/d, he said.
With all of that gas, the company is putting it to good use, said Eresman. Construction has begun on five natural gas fueling stations, and Encana already has deployed nine natural gas powered drilling rigs. It also is continuing to convert all of its fleet vehicles to natural gas, "all part of a commitment to support increased use of cleaner-burning natural gas.
Last year producer was challenged by low gas prices, and the impact was evident in Encana's quarterly and year-end earnings report. Hedging losses resulted in Encana losing $42 million net in 4Q2010, versus earnings of $233 million in the year-ago period. Encana generated operating earnings in the final quarter of $68 million (9 cents/share), versus the year-earlier results of $373 million (50 cents). Cash flow was $917 million ($1.25).
Encana replaced more than 250% of its proved reserves in 2010, adding close to 3.1 Tcfe. Total proved reserves at the end of the year had jumped 12% to 14.3 Tcfe. The company also produced 15% more gas in the final three months of 2010 versus the year-ago period, at 3.23 Bcf/d from 2.69 Bcf/d. There were 760 wells drilled, more than double the 295 drilled in 4Q2009.
The strong output growth was led by the Haynesville Shale in Louisiana and Texas, where average production increased to 303 MMcfe/d from 71 MMcfe/d year/year. Meanwhile average production from the Piceance Basin in Colorado rose to 458 MMcfe/d from 373 MMcfe/d year-over-year. In the Canadian Division, production volumes increased 6% in 2010 mostly as a result of successful drilling programs at Cutbank Ridge and Bighorn, which were up about 28% and 37% respectively.
Net divestitures in 2010 resulted in an average yearly production decrease of about 130 MMcfe/d. In the last half of 2009, Encana shut-in and curtailed production volumes in some resource plays because of low prices. In the first quarter of 2010, most shut-in and curtailed production volumes were brought back on stream. which "resulted in an atypical production profile for some of Encana's resource plays in 2010," Eresman said.
"We achieved solid operating and financial results in a challenging operating environment, which saw prices hovering at what we believe to be unsustainably low levels," he said.
"We define supply cost as the flat Nymex [New York Mercantile Exchange] natural gas price that yields an internal rate of return of 9% after tax, and does not include land costs. Beyond our initiatives to maximize margins by continually lowering our costs, we are encouraged by recent positive market signals and by actions among natural gas consumers and public policymakers who are recognizing the potential for natural gas to play an even greater role in meeting the energy needs of North America."
Encana is basing its 2011 forecasts on a Nymex price of $4.50-5/Mcf and a West Texas Intermediate crude price of $85-95/bbl. Capital spending this year is set at $4.6-4.8 billion, with year-end production forecast to reach 3.48-3.53 Bcfe/d, or 5-7% on a per-share basis. Cash flow for the year is forecast to total $4-4.3 billion.
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