Encana Corp., one of North America’s natural gas stalwarts, may be ready to slim down and sell some of its estimable dry gas portfolio to ready for the future, CEO Doug Suttles signaled on Thursday.
Speaking at the Barclays CEO Energy-Power Conference, Suttles told the audience that there’s an “excess of inventory” in the portfolio, particularly the dry gas plays. The former BP plc executive took the helm in June and a month later he launched a strategic review (see Daily GPI, July 29). The final results from that review are to underpin Encana’s strategy beginning in 2014.
Some of Encana’s portfolio is “very impressive, but we also have found things that we absolutely must change to be successful going forward,” said the CEO. “On the negative side, we actually have more than we need in a very dry gas portfolio…”
To give some perspective on how large its dry gas advantage is, Encana has “75 years of resource potential today…Put another way, we could fulfill all North American natural gas demand for the next three years with our existing portfolio.”
Shareholders and staff are ready for change, said the CEO. “Maintaining the status quo is not an option. I have every intention of making significant change in the areas where improvement is required.”
Encana became a pure-play gas producer just four years ago after Cenovus Energy Inc. was spun off, taking with it nearly all of the oil-rich properties and infrastructure (see Daily GPI, Nov. 30, 2009). The spinoff, however, preceded a particularly cruel time price-wise for natural gas producers. Since then, it has been difficult for Encana to right itself, as evidenced by writedowns and quarterly losses in recent years. Between April and June, however, the year-ago losses were reversed on the back of a growing inventory of oil and liquids output (see Daily GPI, July 25).
Natural gas may have brought Encana to the super independent table, but the next course is smelling like oil.
“Encana has more inventory in its portfolio of plays, particularly dry natural gas, than can be optimally developed,” Suttles said. What management wants to do now is ready for future, and commodity prices “are shaping our view.”
U.S. natural gas “in our sense, will be rangebound in the $3.40 to $4.50 range in the near-term,” he said. Toward the latter part of the decade, “we could see it rise to $4.00 to $6.00” on more demand, but management isn’t looking at “what if” scenarios.
Regarding oil prices, “our sense here is a good demand pull across the world and geopolitical tensions…The cost of new sources of supply suggests to us that Brent will trade at $100 to the $120 range.” West Texas Intermediate (WTI) “is more volatile, and the issue is growth in light, tight oil in North America and takeaway capacity…There could be fairly significant spreads between Brent and WTI in the future, but some could be small, depending on new infrastructure and the ability to move [oil] outside the United States…
“Regional dislocations also are very important to being successful in the future…the value of ethane, feedstocks, the higher components of the gas liquids stream,” and “basis differentials also play a big role going forward.”
Suttles didn’t name any particular properties that might be up for sale, but he said none of the joint ventures in the onshore would be sold. After all, he said, the partnerships are providing Encana about $1 billion a year to spend on development.
Two big oily projects in Encana’s portfolio, however, were specifically mentioned as potential legacies: the Duvernay formation in British Columbia, and the Tuscaloosa Marine Shale (TMS) in Mississippi and Louisiana. Encana is a leading operator in both.
“My sense tells me that very shortly we will be talking about the Big Five plays, not the Big Four,” he said, referring to the Marcellus/Utica and Eagle Ford shales, as well as the Permian and Rockies basins.
“How the Duvernay rocks compare with the Eagle Ford and Marcellus puts us in a fantastic position because it holds billions and billions of barrels of condensate, and we hold about one-third of the top tier acreage. It also fits into where we are best at, in terms of the opportunity at scale and the sites being in exactly the right place…”
The TMS “is not in the same place as the Duvernay…but it could emerge into something material, into a legacy asset…” Encana has been reporting the highest production rates of any producer to date in the TMS, but there’s still more work to delineate its potential.
“There is a lot of capital out there for the right projects, the right teams,” Suttles said. “There’s a much greater focus on profitability moving ahead. Many of the core resource plays right now are about exploitation, where capital efficiencies play an increasing role” as to “where the best rocks are funded, where supply costs are lowest and where rocks are…”
Shareholders appeared enthused on the news, sending the stock price up close to 4% in early afternoon trading. RBC Capital on Thursday raised Encana to “outperform” and set its forecast price at $22/share, versus its current price of about $18.00.
“We believe that Encana has some of the best real estate on the block when it comes to natural gas resources and possesses solid execution capability,” RBC analysts said. “The missing element in the equation has largely revolved around strategic direction.”
First Energy Capital also has upgraded Encana also to “outperform,” while Global Hunter Securities has initiated covered with an “accumulate” rating and a $24.00 price target.
© 2021 Natural Gas Intelligence. All rights reserved.
ISSN © 1532-1231 | ISSN © 2577-9877 |