Encana Corp. delivered strong operational performance in 3Q2011, with North American onshore natural gas and liquids output up 6% from the year-ago period, the company said Thursday. However, CEO Randy Eresman said many of the gas giant’s “drier” plays will see less spending in 2012 to direct more of the budget to pricier liquids-rich and oily shales.
The Calgary-based independent earned $120 million in the quarter, down from $606 million in 3Q2010 after being hit by a currency translation loss of $325 million in volatile markets. Encana reports in U.S. dollars. A year ago Encana reported a currency gain of $136 million. The company generated cash flow of $1.16 million ($1.57/share) versus $1.13 billion ($1.53). Operating earnings rose to $171 million (23 cents/share from $85 million (12 cents).
Encana’s quarterly production growth was led by a 70% increase in the Haynesville Shale, a 13% jump in coalbed methane growth and 16% higher output in the Greater Sierra, which includes the Horn River Shale, where production more than tripled to about 100 MMcfe/d. The producer drilled 164 wells in the latest quarter, 44 fewer than a year ago, but total output still rose 6% to 3.5 MMcfe/d from 3.3 MMcfe/d. Gas production was up 6% to 3.37 MMcf/d from 3.18 MMcf/d. Natural gas liquids and oil output rose 4% to 24,000 b/d from 23,000 b/d.
Eresman, who has said on several occasions that low gas prices were unsustainable, said the company continued to work on ways to strengthen its financial position. He and his management team spoke with energy analysts last week.
“Our third quarter production growth of 6% per share puts us in line to achieve our 2011 targeted growth range of 5% to 7% per share,” he said. “We are highly focused on core initiatives that will strengthen our financial capacity and position us for future growth. Through the expanded application of our resource play hub model — highly integrated and optimized production facilities that continually improve efficiencies — we continue to lower our capital and operating cost structures.”
For more than a year Eresman has said unsustainable low gas prices have forced the company to make adjustments. Expect more in the coming year, he said to analysts.
“Within the 2012 budget, it’s expected that many of our drier natural gas plays will see a reduced capital program, while a growing portion of next year’s capital investment will be directed towards our extensive oil and liquid-rich development and exploration opportunities. From our existing development plays, we expect increase natural gas liquids production by about 55,000 b/d, which will take the company’s total liquids production from the current level of about 25,000 b/d to about 80,000 b/d by 2015.
“Beyond this, we’re pursuing extensive additional organic growth through a continued exploration work across our portfolio of liquid-rich lands. So this is just the beginning of our expected liquids production growth. There will be more to come from other plays as we proceed through the year. But this is what we are prepared to forecast with confidence at this time.”
The CEO noted that even with less capital directed to Encana’s gassy assets, “I want to stress that even at the current strip prices, the full-cycle economics on many of these plays are still very economic. This is in part due to their inherent high quality, but also in part to the longer-term agreements we’ve established with our suppliers and service providers across Encana’s operations and the continued implementation of our resource play hub development model, which has enabled us to offset cost increases with increased capital and operating efficiencies.”
Since the start of this year Encana has been selling midstream properties; it wants to sell $1-2 billion of its midstream properties in North America, including a bundle of properties in the Denver Julesburg (DJ) Basin and the Piceance Basin of Colorado. In January it unloaded DJ Basin properties for $303 million (see NGI, Jan. 24). And in September it sold Piceance Basin properties for $590 million (see NGI, Oct. 17; Sept. 12).
Earlier this month Enbridge Inc. agreed to become majority owner of the under-construction Cabin Gas Plant development in the Horn River Basin after making a C$220 million deal with Encana, which operates the development and holds a 52% stake (see NGI, Oct. 10).
Encana also continues to attract new third-party investments to improve project returns and accelerate development. In July Encana expanded its Horn River farm-out agreement with a Canadian subsidiary of Korea Gas Corp. (Kogas) at Kiwigana in northeast British Columbia. Kogas agreed to invest another C$185 million in nearly 20,000 additional acres of the promising Horn River lands.
In the Kiwigana area the first well pad drilling has been completed and, following completion work this winter, first gas production is expected in the spring. And progress continues on the Kitimat liquefied natural gas (LNG) export project, Encana said. The Kitimat LNG engineering study is expected in the new year, and the partners are discussing long-term sales agreements with Pacific Rim customers (see related story).
Still on the market are Barnett Shale properties in North Texas, assets in portions of the Jean Marie play in northeast British Columbia, and the Carrot Creek assets in Alberta’s Deep Basin. In addition Encana continues to work to secure a joint venture partner for the Cutbank Ridge undeveloped assets in Canada after ending talks in June with a subsidiary of PetroChina International Ltd. (see NGI, June 27).
“Although I won’t comment on the specific deals until definitive agreements have been signed, I can tell you that the interest level is very high, indicative of the high quality of these assets,” said the CEO. “These are all highly competitive processes. We expect to be in a position to provide more information by around year-end.
“The assets we typically consider for these types of joint ventures are plays where our future drilling inventories can be measured in decades. Once we fully delineated the resource and through implementation of a resource play hub processes, we can demonstrate a line of sight to the lowest cost structures that we think can be achieved from the assets. We then create optimal opportunity to accelerate the capture of value through joint venture arrangements. Third-party capital dollars invested in our assets in this way will accelerate the pace of development, and due to the disproportionate nature of the capital spent during their interest, the third-party dollar support our net growth, further lower our cost structures and improve our returns. Our teams have been very, very busy in this regard.”
Encana has taken a dual approach to growing its liquids production, first by expanding NGL extraction from its liquids-rich gas output. An aggressive grassroots exploration program also is under way to target oil and liquids-heavy gas plays across the company’s land base in North America.
In Alberta’s Deep Basin the company’s extraction projects are targeting an additional 55,000 b/d of NGLs by 2015. Encana’s total liquids production by then would reach about 80,000 b/d; it currently is producing about 25,000 b/d. The first project is to ramp up in December with the addition of about 5,000 b/d of NGLs production from expanded facilities at the Musreau, AB, natural gas processing plant.
The company said it now is drilling about a dozen wells on five prospective liquids-rich and oil plays from Alberta to Mississippi: the Duvernay Shale in Alberta, the Niobrara formation in the DJ and Piceance basins in Colorado, the Collingwood Shale in Michigan and the Tuscaloosa Marine Shale in Mississippi.
“The tremendous operational success we’ve achieved by applying our extensive technical expertise in long-reach horizontal drilling and completions in natural gas reservoirs is highly transferable to growing production from liquids-prone reservoirs,” said Eresman. “We have a well established methodology for extracting value from all our production, developing resource plays from the ground up through a low-cost entry approach and through our relentless focus on lowering our cost structures. Over the next few years we expect to significantly increase liquids production in our portfolio.”
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