Natural gas prices may not be attractive enough for some producers, but Encana Corp.’s management team said it’s possible to make enough money in the Haynesville Shale to justify a five-rig program this year.

The Calgary-based explorer cut its teeth in unconventional drilling in the Louisiana-Texas shale, but like other operators, it fled the play as gas prices swooned. The shift continues to more oil and liquids targets, but the Haynesville offers potential that other plays don’t have, said U.S. exploration chief Jeff Wojahn.

“We’ve executed at a much higher level” in the Haynesville, he told analysts during a conference call. “This is a relatively modest program,” and the company hasn’t outlined a longer-term development plan.

“Our primary decision for pursuing and reinvesting in Haynesville because of the strong capital efficiency and profitability of the program,” Wojahn said. “Why is that so? I think there is three factors that we all need to take into account.”

A “large component of our confidence in the program is also related to our previous history and activity…” Encana had embarked on a large land retention program, which allowed more drilling, but it also required more drilled wells on a per-section basis. “This allowed us to find the best-of-the-best sweet spots in the play…And so that puts us in somewhat unique position.”

Second, new state rules in Louisiana allowed Encana to become the first in the industry to obtain a permit to allow a unit with six wells. Encana had finished the wells just before pulling out that were the “highest in the play that extended outwards to reaches of 7,500 feet…

“Over the last year, we’ve been able to look at those wells and carefully understand…their performance and what we found was that they were highly efficient. It changed our belief in what kind of supply concept we can drive in the best part of the play.”

Using the new data, Encana found a third reason to drill: it could make money in the play. “We’re estimating that our supply cost will be in that $2.50/Mcf range,” said Wojahn. “What that means from the profitability point of view is using the flat $3.50 Nymex [New York Mercantile Exchange] price deck, we are able to achieve rate of return of approximately 30%.”

Most of the new volumes would begin in 2014, he noted. “Using a $4 price deck…the yield is approximately 40% rate of return into project economics. And that type of return would be reflective of what the current Nymex strip is for 2013.” Encana’s team thinks it can be “very profitable in the price environment we are in.”

Interesting to note is that while NGI‘s Henry Hub natural gas price index rolled lower during the first three and a half months of 2012 in lockstep with a falling Haynesville/Bossier rig count, the two indicators terminated their relationship during mid April. After the Henry Hub reached $1.85/MMBtu for the week ending April 20, 2012 with an unconventional rig count in the Haynesville of 53 active rigs, prices moved higher, but rigs continued to decline in the play. For the week ending Feb. 15, 2013, the Henry Hub Index stood at $3.29/MMBtu, while only 34 rigs were active in the Haynesville, according to NGI‘s Shale Daily Unconventional Rig Count.

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 heading it up. The Haynesville development is all about exploration and development — anybody looking for an LNG tie-in wouldn’t sap financial resources.

Encana continues to search for a new chief after Randy Eresman resigned unexpectedly last month (see NGI, Jan. 21). 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…”

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 output 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, with expectations 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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