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Deep Panuke Gas to New England Fetches Encana $19.14 on Winter Price Spikes

Natural gas production from the Deep Panuke platform offshore Nova Scotia sold for an average price in 1Q2014 of $19.14/Mcf into the U.S. Northeast daily spot market, Encana Corp. executives said Tuesday. The volumes contributed more than one-third of total operating cash flow.

Gas prices for Panuke are based off of the Algonquin Citygate, said Executive Vice President Renee Zemljak, who runs midstream, marketing and fundamentals. Management discussed quarterly performance during a conference call. "Now that winter has ended, we are expecting Deep Panuke prices to be more equivalent" to gas prices on the New York Mercantile Exchange, which were up 37% from 4Q2013, she said.

"Our view for pricing for 2014 is really going to be based on what happens this summer as we go to inject gas into storage...We have a tremendous amount of gas that we need to inject over the summer...We need to see support for prices."

Encana's long-term view on gas prices hasn't changed, Zemljak told analysts. For "2015 and beyond...we are thinking gas prices will be between $4.00 and $5.00."

Deep Panuke, which began full service in December, has design capacity of 300 MMcf/d and transports gas supplies to the New England market via Maritimes and Northeast pipeline (see Daily GPI, Dec. 13, 2013). Because of winter's deep freeze, New England gas imports between January and March climbed as high as 800 MMcf/d, according to Genscape Inc. (see Daily GPI, May 13).

Encana has put a lot of its gas-rich properties on the market as liquids become more important. In fact, gas production fell 2% year/year to 2.8 Bcf/d. However, hanging on to the Deep Panuke proved to be worth its weight in winter gas price spikes.

Total cash flow during 1Q2014 was $1.1 billion ($1.48/share), 87% higher than in the year-ago period. Deep Panuke volumes alone contributed $395 million, said CFO Sherri Brillon.

"We do not expect to see the strength continue through the year, but we are very pleased at how the project has bolstered cash flow," Brillon said. The company also benefited from higher wellhead realizations relative to local benchmark prices, she noted. Encana's total average realized gas price in 1Q2014, excluding hedges, was $6.37/Mcf. All in, gas prices averaged $5.83/Mcf versus $3.86 in 1Q2013.

Deep Panuke production was at about 87% utilization in the quarter, or around 253 MMcf/d, which "confirmed the well performance," COO Mike McAllister said. The production is contracted to Repsol Energy Canada Ltd.

The offshore producer is Encana's only asset that's not in North America's onshore. With many of its top gas producers on the market, analysts long have speculated that Deep Panuke was on the short list; Brillon hinted about that in January (see Daily GPI, Jan. 15).

Encana, the top natural gas producer in Canada and one of the biggest in the United States, still is continuing to transition to liquids. In the first quarter, 80% of capital spending was deployed to only the Denver-Julesburg and San Juan basins, Canada's Duvernay and Montney formations, and the Tuscaloosa Marine Shale. That funding will be reallocated as the year progresses after the Eagle Ford Shale became the sixth core area. Encana clinched a $3.1 billion deal earlier this month with Freeport-McMoRan Copper & Gold Inc. to acquire about 45,500 net acres that currently produce 53,000 boe/d from about 355 wells.(see Shale Daily, May 7).

Those new Eagle Ford volumes by themselves contribute a lot to the bottom line. Encana's total liquids volumes in 1Q2014 were 67,900 boe/d -- a 56% jump from a year ago. If the Eagle Ford leasehold's output were kept at its current rate of 53,000 boe/d, liquids volumes nearly would double. However, Encana sees an estimated drilling inventory of at least 400 more drilling locations, according to CEO Doug Suttles.

On the strong gas prices and growth in liquids, net profits in 1Q2014 were $116 million (16 cents/share), versus a year-ago loss of $431 million (minus 59 cents). Operating income jumped 192% to $515 million (70 cents/share). Total realized cost savings in the first period because of efficiencies and organizational changes were almost $40 million. Encana ended the quarter with almost $2.2 billion in cash and cash equivalents on its balance sheet.

"Encana is finally turning the corner," wrote Motley Fool's Matt DiLallo. "While higher natural gas prices helped last quarter's results, surging liquids production is what will drive Encana higher..." The company "looks like it is finally headed in the right direction, which is very good news for its investors."

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