Thursday, February 14, 2013

Exploring Encana's Motivation to Expand in the Haynesville

Encana held its year end earnings call earlier today.  There was one mention of the Haynesville Shale in the company's prepared remarks, but it certainly caught my interest given Encana's "dark period" in 2012.  Here it is verbatim:
"Turning to the Haynesville. Louisiana’s Office of Conservation amended its rules to allow drilling of cross-unit wells with consent of a simple majority of owners in units affected by drilling. This policy change enables Encana to develop its acreage with lateral lengths averaging more than 7,500 feet and 6 wells per 960 acre unit, thereby reducing capital requirements and improving program metrics. We have allocated about $270 million to our Haynesville asset in 2013 to demonstrate the robust economics of advanced well design."
Encana has been pushing the longer laterals and has had some success with the few they have completed in Louisiana.  The capex figure of $270 million pleasantly surprised me.  Encana expects to make money (30% IRR) at $3.50/MMBtu and have five rigs working by year end.  The longer laterals cost around $13 to $14 million per well, but a 7,500 foot lateral could yield an 18 Bcf estimated ultimate recovery (EUR) per well, especially now that the company is adopting the restricted choke approach pioneered by other Haynesville producers that have been successful in flattening decline curves and achieving higher recoveries.

Analysts sound skeptical of Encana returning to the Haynesville, suggesting that its push into liquids has been underwhelming.  That suggestion might gain traction if Encana is alone in dipping its toe back into the Haynesville water.  Or maybe the economics of the longer laterals do work better.  Chesapeake says it doesn't make sense to drill the Haynesville south of $4.25/MMBtu.  Is Encana's acreage that much better?  Maybe when cherry picking the sweet spots.

But is chasing a 30% return - before burdening it with lots of corporate overhead - really worth the effort?  Encana management talked a lot about "capital efficiency" on the call, which suggests that the Haynesville at ~$3.50/MMBtu is among the better places the company has to spend its money.

Another thought is that drilling wells with 18 Bcf EURs that can make money at $3.50/MMBtu would make their Haynesville acreage more valuable and could increase the company's booked reserves.  The acreage would look more attractive to JV partners or as a potential acquisition.  Maybe Encana's return to the Haynesville is a corporate value and asset value play rather than a move to boost cash flow and profitability.  If so, moving back into the Haynesville might have a greater value for Encana than it appears on the surface.  As someone wiser than me once said, "you have to spend money to make money."

Given the Haynesville Shale's strategically favorable location near industrial users, potential LNG export facilities and massive pipeline infrastructure, the play still has long-term value even if it only produces dry gas and its short-term prospects have been deeply hindered by low natural gas prices.  But think about it like an Asian investor - you've got 18 Bcf wells within spitting distance of LNG export infrastructure with an expanded Panama Canal coming online in 2015.  You quickly forget about the current price of natural gas when valuing these assets. 


Anonymous said...

Any insight as to what this may mean for those of us whose lease Encana let expire a few years back? Good, bad, neutral? Thanks!

Robert Hutchinson said...

I'd say neutral at this time. I would suspect that they will drill on areas that they have already prospected and not take on new leases. I think every dime spent will be towards the goal of drilling/producing. Their strategy is to prove the super-sweet spot. They didn't say it directly, but I believe a large portion of their Haynesville acreage is not economic in the $3.50, $4.00/MMBtu range. I think they are cherry picking.