Wednesday, May 27, 2009

EnCana: Haynesville Conference Call

EnCana operating executives held a very interesting investor conference call regarding the Haynesville and Deep Bossier Shales this morning. It covered a lot, so I'll discuss it in a few different posts. The call didn't focus on results from specific wells but provided lots of information about the future of the Haynesville Shale, about which EnCana is very excited.

In the big picture, EnCana (and others) sees conventional natural gas production in North America in "irreversible decline" but at the same time sees unconventional gas plays as more than replacing production from the conventional plays. As a result, the company has tailored its business strategy around exploiting unconventional gas. The chart below says a lot about the future and the importance of plays like Haynesville.

They see that success in unconventional plays stems from big leasing operations and the best and most efficient use of technology. The subtext to me is that bigger is better. The little guy is S.O.L. in a future that is so capital and technology-based.

The executives focused much of their attention on the Louisiana side of the play. While they have an interest in approximately 435,000 net acres, they view the sweet spot as northern DeSoto and Red River Parishes, coincidentally where EnCana has a big chunk of leases, as shown on the map of "the fairway" (sort of like GMX's "de-risked acreage" map) below.

I'll talk more about geology in a later post, but they see higher potential for the land in the eastern part of the play because of the higher porosity of the shale. They also mentioned that the Company sees the sweet spot moving south in the play (at least they what they identify as the sweet spot is farther south than previously expected).

EnCana also talked about the business strategy for their operations in Haynesville. While it is still an emerging play, operators are in the second phase of their business strategies, having left the land rush phase. Now they are in the "Land Retention Strategy" phase, which means that they are going to judiciously select drill sites based on maintaining the best lease acreage. To realize the land retention strategy, EnCana is allocating an additional $290 million of capital to the Haynesville Shale. At the same time, EnCana is looking for partners to drill areas that might be less productive so the company can focus on the bigger payday. Not to say that the other leased areas are worthless - it's just that EnCana doesn't estimate them to be as valuable as leases in their sweet spot. But as the interpretation of the location of that sweet spot changes, the amount of land it is willing to offload is becoming smaller. Where it once intended to offload 134,000 acres, the number now seems to be about 30,000 acres. The slide below summarizes the land retention strategy.

Next phase in the strategy is the "Multi-Well Pad Gas Factory Operations." Sort of a mouthful, but it basically means that they will incorporate all that they have learned in drilling in both the Haynesville and Deep Bossier Shales and replicate it across their leasehold. It's been a steep learning curve, but based on the call, EnCana has learned a great deal. More on this later.


V said...

on page 18 of the related investor presentation, there is an illustration of a multi well pad 'gas factory'. It shows one well in 1 section with laterals to 3 adjacent sections. Does this mean only the landowners in the section with the actual well receive royalties?

Robert Hutchinson said...

No. I believe the drawing in question assumes the company has lease rights to the three different sections being tapped. The illustration is meant to show that one well site can service a wide area. When the drilling unit is established, the owners of the mineral rights for these sections and the adjacent sections are considered in coming up with the unit percentages.