Encana Keeps The Gas On, Invests $600 Million
COMMENTARY—ProspectingJournal.com—These days, it’s hard to find someone who is “cautiously optimistic” about the price of natural gas. In fact, the short-term prospect of anything is hard to see in a positive light. Oil just received the biggest two day drop in over nine months, the DOW lost the second most points this year, the TSX plunged 348 points, the AUD got smacked, and bad news in regards to China PMI let the air out of recovery hopes.
Combine all this with a market that, for some time, has been struggling with an oversupply of natural gas and indeed you have a tough business environment for natural gas (and now oil) producers. Many of these companies have often restricted production to combat the exceptionally low price of natural gas, which they hope will function as a price stabilizer until the market tips back up.
While this has played into Encana Corp’s (TSX: CAN) strategy, Encana has also pushed to diversify towards growth instead of restriction. At least, kind of. President & CEO Randy Eresman has been quite frank about the Company’s challenge: “As an almost pure-play natural gas producer, Encana has been most affected by the low price of the commodity caused by the continued excess of supply.”
To visualize Randy’s statement:
Yet despite this market reality, Encana has just verified a pledge to invest $600 million to boost natural gas and oil production. As Eresman points out, Encana remains “cautiously optimistic” as the Company has transitioned from the development of natural gas to oil and natural gas liquids. This approach will produce what Encana hopes is a “more balanced operating cash flow stream in 2013.”
The plan for 2012 has been expanded to drill between 115 to 120 wells in 10 plays, primarily focused on oil. For 2013, the Company expects to drill approximately 350 oil and liquids wells. For shareholders, this is a welcome dose of optimism for a Company that it far off from its 2008 highs.
Encana expects annualized natural gas production to remain near its current levels of about 3 billion cubic feet per day for 2012 and 2013. Yet liquid production will reach 60,000 to 70,000 barrels per day, 40% of which will be oil and field condensate. “This represents a two year compound annual growth rate of approximately 65%, based on the midpoint range.”
For Encana’s sake, let’s hope commodities don’t take a further hit. The Company’s move to diversify away from a struggling commodity is a smart play in today’s environment. But if oil keeps dropping—and signs indeed point to it—the challenges will persist.