Encana Corp. is hunkering down with a reduced spending plan for 2012 in dry natural gas plays and a shift to investments to liquids and oil-prone unconventionals in North America, CEO Randy Eresman said last week.
Speaking at the Barclays Capital CEO Energy-Power Conference in New York City, the Encana chief outlined the shift by North America’s second largest gas producer. Asset sales, like the latest announced last week, a $590 million deal to sell Piceance Basin midstream properties to an undisclosed buyer, will provide a financial cushion, he told the audience. And the company still remains on track to “meet or exceed” a plan to sell $1-2 billion in assets by the end of this year.
“We are currently planning for a reduced capex [capital expenditure] program for 2012 should gas prices remain stubbornly low,” Eresman said. “At this point in time, we don’t feel it is appropriate to be growing production at a very high rate in this marketplace, to exaggerate the oversupply situation.”
Because of sustained low natural gas prices, “we believe it is prudent to live within the boundaries of our cash flow generation,” he said. “That is to say, our 2012 capex will likely be lower than our forecasted cash flow, less dividends. Although we have just begun our annual budget process, this is what you should expect from Encana this coming year…Our intention is to pragmatically reduce our debt level.”
Encana’s 2011 budget has spending outpacing cash flow, he noted. The company plans to spend $4.6-4.8 billion in 2011, with cash flow of $4-4.3 billion. That spending is coupled with an average annual dividend payout of about $600 million.
The company has “an opportunity to create additional value during this period of low natural gas prices,” said the CEO. “Our capital investments target our most economic growth opportunities. We intend to apply our considerable expertise — employing the same leading technologies and operational efficiencies that have so successfully unlocked our natural gas resource plays — to the evaluation and development of our liquids potential.
The Piceance Basin properties, to be sold by subsidiary Encana Oil & Gas (USA) Inc., were built in the last decade to serve the producer’s Mamm Creek, Orchard and South Parachute output in the area near Rifle, CO. The midstream units gather and transport about 500 MMcf/d and include about 260 miles of pipeline and 90,000 hp of compression facilities.
The company has several midstream properties on the market; early this year the U.S. subsidiary sold the Fort Lupton, CO midstream properties to Western Gas Partners LP for $303.3 million (see NGI, Jan. 24). Also up for sale are Encana’s Barnett Shale stake in North Texas, portions of the Jean Marie in northeast British Columbia and the Carrot Creek assets in Alberta’s deep basin. In addition the Calgary-based producer has restarted a process 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).
“Following our Fort Lupton gas plant divestiture earlier this year, this Piceance divestiture represents our second successful step in capturing significant unrecognized value from our midstream assets,” said Encana’s Renee Zemljak, executive vice president Midstream, Marketing & Fundamentals. “We have a strong track record of leading the construction of midstream facilities, which gives us the competitive advantage of being a first mover in the development of natural gas resource plays.
The Piceance Basin sale is expected to be completed by the end of this year. Midstream property stakes also drawing “considerable interest from prospective purchasers” include the Cabin Gas Plant in the Horn River Basin and the Cutbank Ridge assets in Alberta, Zemljak said.
The North American oil and gas landscape has changed significantly, Eresman noted.
“Natural gas has gone from being in short supply to being abundant, and the highly successful development techniques that enabled the cost-effective development of prolific unconventional natural gas reservoirs are now successfully being deployed in certain oil and liquids-rich natural gas reservoirs as well. Natural gas prices have continued to remain low, whereas prices for oil and natural gas liquids have improved substantially.”
Encana has about half of its expected daily natural gas production hedged from now through the end of 2012 at prices averaging more than $5.75/Mcf. Expect to see more refinement and optimization of its North American hub developments as the company targets “continued reductions in supply costs towards a goal of $3/Mcfe for all of its drier natural gas plays,” said Eresman.
“Within the 2012 budget, it is expected that many of Encana’s drier natural gas plays will see a somewhat reduced capital program, while a growing portion of next year’s capital investment will be directed towards the company’s extensive oil and liquids-rich development and exploration opportunities.”
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