Encana Corp. is cutting back its capital expenditures (capex) and shifting more resources to oil and liquids, but the gassy Haynesville Shale remains on the development list, a top executive said Thursday.

The Calgary producer cut its teeth in unconventional drilling in the Louisiana-Texas shale play, becoming one of the lowest-cost operators before gas prices collapsed.

However, an exploration and development program in the Haynesville has restarted, in part because the management team thinks it can produce there at a profit, and in part because its location makes it a strong go-to basin for potential Gulf Coast liquefied natural gas (LNG) exports. Two rigs now are running in the play, with plans to lift the number to five this year.

“The Haynesville is ideally located to be an LNG feedstock play,” said U.S. exploration chief Jeff Wojahn. “We’ve worked on a large-scale development plan with prospective partners…With tons of Tcf of deliverability that could be used to fund a long-term commitment in LNG.”

The shale play “is ideally suited to do that.” Potential partners are “still embracing the thought of integration” with an exploration and production company, he added.

Encana recently withdrew from a consortium that wants to build an LNG export facility in Kitimat, BC. Chevron Corp. and original partner Apache Corp. now are leading up the Kitimat LNG project. The Haynesville development is all about exploration and development — anybody looking for an LNG tie-in wouldn’t sap financial resources.

However, the Haynesville’s economics look solid, Wojahn noted.

“Our primary decision on Haynesville is because of the strong capital efficiency and profitability,” he told analysts during a conference call. “Why is that so? There are three factors, including new [Louisiana] state rules that drive efficiency.

“But a large component of confidence also is related to our previous history and activity,” Wojahn said. “We had to maintain a land retention program, and it required us to drill wells, which allowed us to find the best-of-the-best sweet spots in the play. That puts us in a unique position…”

Wojahn reminded analysts that Encana had been the first in the industry to unlock the Haynesville’s potential. The producer and its peers took a drilling “hiatus” when gas prices swooned, but Encana had at the time just drilled six wells with extended lateral lengths of about 7,500 feet.

“Last year we looked at the wells to understand the costs and the efficiencies,” he said. “We found them to be highly efficient and it changed our view of what we believe in what kind of supply costs we can drive in the best part of the play.

“What we are modeling is an estimated [natural gas price] cost that will be around the $2.50/Mcf range. That means from a profitability view, a flat $3.50 Nymex price deck would achieve a rate of return of 30%” in the play (Most of the new volumes would come on line in 2014).

“So at a $4.00 price it would a 40% rate of return…and that type of return would be reflective of the Nymex strip in 2014,” said Wojahn. Using a “new modern design in the core areas,” he said the operator should be able to achieve about 18 Bcf per well.

“We’ve executed at a much higher level” in the Haynesville. “This is a relatively modest program,” he said “We also are looking at the fundamentals…We haven’t outlined a longer-term development plan…

“We have a tremendous resource and we’ve established a large position. Now we have the opportunity to carefully capitalize the level of commerciality for this…We’ve demonstrated a track record of operational excellence, and the know results have come from a careful study of the past.

Encana continues to search for a new chief after Randy Eresman resigned unexpectedly last month (see Daily GPI, Jan. 15). Board member Clayton Woitas, CEO of privately held Range Royalty Management Ltd., is the interim president and CEO.

The company no longer can rely on gas prices gaining strength, Woitas told analysts. “We don’t control the commodity prices, but we do control the costs…

“Our first priority for 2013 is profitability and running a business that continues to be sustainable in the current low natural gas price environment. Second, we intend to maintain financial strength and flexibility and third, we are setting a target to be among the lowest cost producers of natural gas in North America.”

Capital expenditures (capex) this year have been cut to $3 billion from $3.2 billion, with joint venture partners adding another $750 million. Last June the management team set a 2013 capex goal of $4-5 billion. Close to 80% of this year’s spend is to be directed to oil and liquids, with the remaining 20% to gas projects.

However, even with the huge shift in capex, gas production likely will be near current levels, at about 2.83 Bcf/d. Last year, gas production fell to 2.98 Bcf/d from 3.33 Bcf/d in 2011. U.S. gas output declined to 1.62 Bcf/d from 1.88 Bcf/d, while Canada production slumped to 1.36 Bcf/d from 1.45 Bcf/d.

The declines in gas production were dramatic in 4Q2012 compared with 4Q2011 — to 2.95 Bcf/d from 3.46 Bcf/d. U.S. output fell to 1.54 Bcf/d from 1.94 Bcf/d, and Canadian ouput dropped to 1.41 Bcf/d from 1.52 Bcf/d.

Meanwhile, Encana has high hopes for its extensive oil and natural gas liquids portfolio. This year the company expects to nearly double production to 60,000 b/d from 2012’s average output of 31,000 b/d after royalties. The figure is actually 10,000 b/d below last June’s forecast, lower because of the cutback in spending, Woitas noted.

Cash flow is expected to be about $2.3-2.5 billion this year, and Encana plans to sell $500 million to $1 billion in assets. Sales fell 35% in 4Q2012 to $1.51 billion. Reserves in 2012 fell by 7.7% to 13.1 Tcf, primarily on low prices.

Encana reported a narrower 4Q2012 net loss than a year earlier, at $80 million (minus 11 cents/share), versus $476 million (minus 65 cents). Excluding hedging losses and other one-time items, profits in the final three months of 2012 were 40 cents/share, which was 1 cent more than Wall Street’s average estimate.

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