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Encana Reverses Losses, Plans Revamped Onshore Strategy
With solid second quarter results in the books, Encana Corp. is taking a look at its entire North American portfolio and has begun putting a “new emphasis on our portfolio of emerging liquids plays,” newly installed CEO Doug Suttles told investors last week.
Suttles, a former BP plc executive, took the helm of the Calgary operator just weeks ago (see NGI, June 17). He presided over his first earnings conference call to discuss how the company intends to shift its focus and to highlight quarterly operations.
“Solid operational performance,” led to a 69% year/year increase in oil and natural gas liquids volumes, with average production rising to about 47,600 b/d from 28,200 b/d. Natural gas production volumes for the quarter averaged about 2.76 Bcf/d, versus 2.80 Bcf/d a year ago.
Net earnings climbed to $730 million (99 cents/share) in the quarter, versus a loss of $1.48 billion (minus $2.01) a year ago. Operating earnings were $247 million (34 cents), up from $198 million (27 cents). Revenues rose to $1.93 billion from $731 million. Encana also had $2.92 billion in cash at the end of the second quarter, up from $1.87 billion a year earlier.
Like many gas-weighted operators, Encana has transferred some if its expertise in multi-well pad drilling to liquid targets across North America (see related story). “Our results over the first half of the year have us well positioned to deliver on our guidance targets for 2013,” said Suttles. “Our focus moving forward is to continue to exercise capital discipline while working to achieve ever greater efficiencies in how we run our business. We expect to see cost savings materialize throughout the rest of the year as a result of those efforts.”
Most encouraging during the quarter were results in two emerging liquids plays, Canada’s Duvernay formation and the Tuscaloosa Marine Shale (TMS), where Encana has about 335,000 net acres. Solid results also are accelerating development in the San Juan and Denver-Julesburg (DJ) basins, as well as the Clearwater oil play, said the CEO.
U.S. production now is about 14,000 b/d of oil and 9,100 b/d of natural gas liquids (NGL), U.S. operations chief Jeff Wojahn said.
“Our biggest driver area is the DJ Basin, where we have three rigs running right now and anticipate growing our rig count to five by year-end,” said Wojahn. “But we really see broad growth across our portfolio with our recent renegotiation of a liquid extractions contract in the Rockies. You’re going to see growth in our NGLs and condensate in the Piceance Basin and Jonah.
“And to a lesser extent, you’ll see growth coming from some of our emerging plays, like the San Juan, Eaglebine and TMS. But it’s really broad-based and primarily coming from, what we call, our base commercial assets.”
The TMS results to date have been good, but Encana still is on a learning curve, Wojahn said. “I think one of the key drivers for us is to look at our drilling performance and our overall cost performance. In the last three wells, we have, by and large, hit our targets, our target cost projections for the play, normalized for completion intensity. So that’s very good news, and that was something that we struggled with in the past.”
Encana’s much talked about Anderson wells (17-1, 17-2) in the TMS are being completed and nearly ready to begin sales (see NGI, Sept. 24, 2012).
“Obviously, there’s industry activity going on right now, and we’ve been monitoring that closely as well,” Wojahn said. “One event that occurred to TMS this year that was very significant for us…is House Bill 1698 that was passed by the Mississippi House and Senate,” which led to a reduction to 1.3% from 6% on the state’s severance tax…That equates to about a $700,000 savings per well…We feel the upcoming two Anderson wells are really going to be indicative of the future of the play.”
One discouraging note in the United States has been the Mississippian Lime, where results have been mixed. Encana has decided to exit its position there, Wojahn added.
Canada operations chief Mike McAllister said the Duvernay leasehold is producing 900 b/d of free condensate and about 3 MMcf/d of natural gas. “We think we’ve cracked the technical nut with respect to the completions,” he said. Encana is moving to multi-well pad drilling in the play in 2014.
Beginning in late February, an outage at the company’s Pembina Musreau deep cut plant in Canada put NGL processing there out of commission for eight weeks, McAllister said. “The effect of that in the first half of the year was about a 3,000 b/d hit on our production…That plant came back up on April 20 and has been running fine ever since,” helping to increase NGL output.
For the second half of the year, Suttles said his “top priority” is building the revamped strategy, which has stumbled of late as it moved from being one of the biggest natural gas producers in North America to a more liquids-based enterprise. The revamped strategy should be completed by year’s end and implemented in 2014.
The portfolio-wide review could lead to selling less valued properties and possibly bulking up liquids positions, he said. “We are taking a rigorous and measured approach to funding these plays, evaluating each of our positions against their commercial potential, scale and ultimately, their strategic fit.” Management is doing a “roots up look” at the asset base and its strengths and opportunities, as well as the margin structure.
“We’re looking real hard at our core skills and what we’re really good at,” said Suttles. “And we’re also taking a hard look at our competitive position, how good are we, not only as an enterprise, but also in a play-by-play sense against our competitors…In addition, we obviously have to take a view of the future where the opportunities will be.”
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