Encana Corp., one of the biggest natural gas producers in North America, knocked out low prices during 1Q2012 with a solid commodity price hedging program, asset sales and joint ventures, turning the table on year-ago losses. To keep a stranglehold on declining prices, the independent also is reducing gas production through spending cuts or shut-in wells.

As many unconventional producers have learned, taming the gas beast now that it’s out of its cage can be a difficult task. Encana’s gas production in the first three months of this year was 2% higher than a year ago at 3.27 Bcf/d, however, it was 5% lower than in the final three months of 2011.

Management said it was on track to target gas capacity reductions in 2012 totaling about 600 MMcf/d gross before royalties from 2011. Half of the reductions are to come from a spending cut, while the other half would be attributable to physical shut-ins or curtailed volumes.

“There is a current weakness in market fundamentals due to an oversupply of natural gas, and it is clear that a continued reduction of drilling activity will be required to restore market balance,” said CEO Randy Eresman. The management team had seen the writing on the wall a year ago and readied a strategy for what Eresman said last year would be a “prolonged environment” for depressed North American gas prices (see Daily GPI, April 21, 2011).

“Over the past year, Encana’s teams have been very successful in advancing multiple oil and liquids-rich natural gas plays toward commerciality,” he said. “Our tremendous depth and breadth of experience, and focus on highly efficient development programs, have greatly accelerated the speed at which our teams have been able to transition operating expertise from natural gas to oil and natural gas liquids [NGL] resource plays.”

The past year’s work has appeared to pay off. The Calgary-based independent posted net earnings of $12 million in 1Q2012, versus a loss of $361 million a year ago. Cash flow was up 6% year/year to $1 billion ($1.39/share), lifted by the hedging program, which contributed $358 million (49 cents) in realized after-tax gains. Operating earnings jumped 10% to $240 million (33 cents/share).

Encana is aggressively expanding its exploration and development in oil and NGLs throughout its 11 million-plus net acres in North America; liquids-heavy production in 1Q2012 was higher by 26% from a year ago to about 29,000 b/d.

Encana also has fortified its balance sheet at the end of March by building a cash position of about $2.4 billion through an “effective commodity hedging program, operational efficiencies, and recent dispositions and joint venture transactions,” said Eresman.

Among its fortifications were the sale of Cutbank Ridge gas processing assets for C$920 million; a Cutbank Ridge partnership with Mitsubishi Corp. for C$2.9 billion; a joint earning agreement with Exaro Energy III LLC in Wyoming’s Jonah field for $380 million; and an agreement with a subsidiary of Toyota Tsusho for coalbed methane development in Alberta for C$600 million.

“We continue to seek and develop partnership opportunities for the exploration and development of oil and liquids-rich assets throughout our land base, and for dry natural gas plays that could be linked to liquefied natural gas (LNG) projects,” said Eresman. “Our target is to maintain financial strength and flexibility by balancing capital investment with cash flow. By accelerating investment in prospective oil and liquids-rich natural gas plays we expect to diversify our commodity mix and sources of cash flow.”

Encana is a partner with Apache Canada Ltd. and EOG Resources Canada Ltd. in KM LNG, which secured a 20-year LNG export terminal license from Canadian regulators last October (see Daily GPI, Oct. 17, 2011). A final investment decision on the export terminal, which would be constructed near Kitimat in British Columbia, is to be made this year.

Despite the current weakness in North American gas market fundamentals, “recent industry developments and announcements related to the increased use of natural gas and potential future LNG export projects may also contribute to a price correction,” said the CEO.

“We continue to see cause for optimism for higher natural gas prices in the approval of natural gas exports and export facilities, coal plant retirements, increased industrial demand for ethane and other NGLs, and gas-to-liquids projects,” he said.

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