Encana Realigns

Canadian oil and gas giant Encana Corp. recently announced a portfolio reorganization away from gas assets, which have traditionally been the core of the operator’s production strategy, and toward a more liquids-rich base. While many North American operators began to make this shift in 2009, when natural gas prices fell to their lowest level in six years, Encana took a contrarian approach, spinning off its integrated oil assets into Cenovus Energy so that it could focus on natural gas production.

Three years later, in December 2012, the natural gas price environment in North America remained unchanged, and Encana declared that through a series of deals it would exit the Kitimat liquefied natural gas project, sell large portions of gassy acreage such as its sizable position in the Horn River, and reallocate capital to further develop liquids production.

In its January 2013 investor presentation, Encana management disclosed that the operator derived about 81% of 2012 operating cash flow from the sale of natural gas. That percentage should decrease to around 57% in 2013 as operating cash flow from oil sales increases from 12% to 22%, and operating cash flow from the sale of natural gas liquids (NGLs) increases from 7% to 21%.

Encana is realigning its portfolio through a combination of such early-life plays as the Duvernay and more-established resource plays like the Montney. Both are in the Western Canadian Sedimentary Basin; the Duvernay lies in Alberta and the Montney stretches from Alberta into British Columbia.

The Duvernay is an emerging liquids play that has been compared to the Eagle Ford due to geological features such as porosity, thickness and the large amount of estimated resource in place. In addition to these positive characteristics, there are other elements that can play a part in Encana’s success in the play.

Encana currently has a 50.1% working interest in 445,000 acres in the Duvernay (with the remaining 49.9% WI held by PetroChina). Combined, the firms expect to spend approximately $4 billion during the next four years developing the play. Encana has forecasted between 1,000 and 1,600 possible well locations on its acreage (using 160- to 330-acre well spacing) and has estimated that the petroleum initially in place is approximately 9.1 billion barrels of oil equivalent (BOE). This could translate into a giant oilfield (500 million barrels or higher) for Encana if the company achieves targeted recoveries of 3- to 6 billion cubic feet of gas and 350,000 to 600,000 barrels of liquids per well, as stated in its January 13 corporate presentation.

As of fourth-quarter 2012, Encana planned to drill approximately 24 wells in the Duvernay in 2013, which Hart Energy estimates would each produce between 500,000 and 1 million BOE over their useful life at a capex cost of approximately $15 million per well.

If well results are encouraging, development would likely increase rapidly in the play, as its geographic location will allow Encana to benefit from existing Cardium infrastructure.

While originally developed as a gas play, liquids-rich portions of the Montney in the areas near Tower and Ante Creek have provided new opportunities for operators transitioning to liquids. Arc Resources has demonstrated encouraging results at Ante Creek, reporting a 50% dry-gas-to-liquids ratio in an area close to a portion of Encana’s 1-million-plus-acre position in the play. The capex per well in the Montney varies from $5- to $10 million.

Encana noted in its investor presentation that it has driven down the supply cost of Montney gas from $3.15 per million Btu in 2011 to $2.76 per million Btu in 2012, based on its hub design and development strategy. Supply cost is defined as the flat Nymex price that yields a risked internal rate of return of 9% and does not include land or G&A costs.

In addition to its increased emphasis on the Duvernay and liquids-rich portions of the Montney, Encana is ramping up activity in such U.S. resource plays as the Mississippi Lime, the Niobrara and the Eaglebine.