Friday, February 14, 2014

Outlook: Encana (Haynesville and TMS)

The Haynesville Shale outlook for Encana can be summarized in one word:  "dark."  On the company's Q4 earnings call yesterday, CEO Doug Settles summed it up:
"we stopped our drilling program there...It’s an asset we like, but we don’t see it as competitive with other investment opportunities in our portfolio, nor consistent with our strategic focus right now which is to better balance our liquids and our gas volumes in the portfolio."
That pretty much sums it up.  Encana has six wells left to be completed from its recent drilling binge, at the peak of which it employed four rigs from late May to early November 2013.  Those days are over and the company is focusing on its "five core growth assets," two of which are in Canada, two in the U.S. Rockies and the Tuscaloosa Marine Shale (TMS).  The order of the day is liquids and the word of the day is "discipline."  This means Encana will stay within cash flow in terms of its capital expenditures and 75% of its capex will be on the Big Five.  That means the company will neglect its Haynesville holdings for at least a year.  Its 2013 drilling binge probably created enough supply to satisfy takeaway and joint venture obligations but not much more.

The open question going forward is will Encana hang onto its Haynesville acreage?  For that matter, will it hang onto its TMS acreage?

Those are very different questions.  Encana has been roiled in uncertainty this past year as it instituted cutbacks under the new CEO.  The company's strategy is now summarized by the phrase, "Getting Back to Winning."  Hopefully it will not be in a Charlie Sheen kind of way (although some would argue that he won in the end).  The bottom line is that the company holds its Haynesville acreage by production and is in no hurry to drill unnecessary wells.  Other than the opportunity cost of owning a withering asset (at least when not being drilled) that is likely valuable to someone else, Encana is probably not in a hurry to divest its Haynesville holdings.  It's a nice ace in the sleeve when gas prices rise.

But the company's focus has shifted west and northward, as evidenced by its consolidation of U.S. operations to Denver and the closing of its recently constructed 12 story Plano, TX office building.  I have to wonder if the TMS will be a long-term hold.  The company has two rigs focused on the play and is still trying to complete its appraisal of the play.  It calls its 2014 TMS plan "front-end loaded," presumably indicating that it will make a decision about viability soon.  I've heard rumors that Encana's success in the TMS has been spotty, and I wonder if it remains one of the Big Five only to maintain its value in the marketplace when Encana goes to sell it.  This is purely my speculation, but I think ECA will further consolidate its efforts northwestward and focus on lower risk bets.

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