EnCana Corp. is considering whether to sell some of its “small, scattered assets” in its U.S. portfolio, and an as-yet unformed master limited partnership (MLP) could be a potential buyer, CEO Randy Eresman said Thursday.
Eresman, speaking at the Bank of America Energy 2007 Conference, said EnCana has been “watching the evolution of the MLP business in the U.S.” to consider future opportunities. Most of the energy MLPs now in the marketplace hold midstream assets, but a growing number have been formed in recent years to hold mature exploration and production (E&P) assets.
EnCana also may consider selling some of its mature Canadian properties, but Eresman said the company’s “first preference would be to sell assets into the MLPs.” From a “timely perspective, now is not the best time to do divestitures…If the market evolves, we might execute a [transaction] but in the capital markets, I’m not comfortable where they are at right now,” and he added, “we’re not committed at this time.”
In any case, Eresman said the company plans to focus on developing the stable of projects it has and is “unlikely” to make any more purchases like its $2.55 billion buyout earlier this month of partner Leor Energy’s 50% stake in the Amoruso natural gas field in the Deep Bossier sands of East Texas (see NGI, Nov. 12). EnCana also is developing an integrated oilsands project in Canada with ConocoPhillips.
The Calgary-based producer, with all of its 27 million net acre leasehold located in North America, is 71% weighted to gas. Forty-two percent of its assets are in the United States and the rest are in Canada.
“We want to be selective about the projects that we pursue so that we are able to respond to market conditions,” said Eresman. “In 2008, we will look to add or subtract assets to continually update our portfolio.” Like its Deep Bossier purchase, Eresman said EnCana would “only do bolt-on acquisitions of properties that we know very well…That leaves relatively few that we’d find attractive.”
Asked whether the Alberta royalty hikes, scheduled to take effect in 2009, would force EnCana to shelve any plans for the province, Eresman said the company had not yet made any commitments one way or the other. In October EnCana warned that it might reduce its spending in Alberta by US$1 billion because of the changes.
“It’s not clear to us that all of the rules have been firmly decided,” he said of the royalty changes. “The government is still working on the nuances, and that may factor into our decisions. Other things may have to be factored in also. The rise in the Canadian dollar has added to our costs, both capital costs and operating costs, which has affected us in the short term. We also have quite a bit of inflation in Western Canada, more so from a manpower cost. A drop in cost inflation has been partially offset by reductions in the service sector, also from a manpower perspective…Overall, there’s a higher demand for oilsands, which also has led to higher manpower costs…”
The Alberta royalty regime changes “add a layer of uncertainty more than anything else.” With Canadian provinces and the federal government facing elections next year, “We’ll have to wait it out…” However, if producers are waiting for higher commodity prices to decide whether to proceed on Alberta projects, that also could be a losing proposition.
“If you need to wait for a higher price for your project to become economic, it may never be economic because all of that [in taxes] goes back to the province” under the changes. In 2008, “we probably will see a reduction of activity” in the province because of the royalty changes.
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