Encana Corp. is breaking a budget promise it made just four months ago.
The energy giant, trying to distance itself from the depressed natural gas market, jacked up its spending plans for 2012 by $600-million (U.S.) as it targets increased production of more lucrative gas-related commodities such as propane and butane.
The move, however, won’t boost the company’s financial results as quickly as investors want, which sent its shares tumbling Thursday. Encana now expects spending to outpace cash flow as it increasingly targets production of oil and natural gas liquids.
That’s a major shift from the company’s previous pledge to keep spending in check. When Encana detailed its 2012 budget in a conference call in February, chief executive Randy Eresman said it was “designed to live within projected cash flow after dividends.”
On Thursday though, Mr. Eresman issued a different outlook.
“To transition our portfolio at a meaningful pace in the current natural gas price environment, it is clear we will need to invest more than our cash flow for at least the next 18 months,” he said at a presentation to investors.
Encana expects to spend between $4-billion and $5-billion in 2013, with cash flow ranging from $2.5-billion to $3.5-billion, though it will supplement its cash flow with joint venture deals and by selling assets.
Encana’s decision to increase its budget rather than rein in spending contrasts with other energy companies, which are pulling back on project outlays to protect themselves as natural gas hovers near all-time lows. While the revised budget highlights how Encana’s balance sheet and extensive collection of land gives it options others lack, it also demonstrates how urgently companies are moving away from natural gas.
But while Encana plans to ratchet up natural gas liquids production by 7 per cent in 2012, it concedes this market also faces challenges. It predicts the benchmark price for a barrel of natural gas liquids – a mix of ethane, propane, and butane – will fall in 2013.
Despite adding $600-million to its original $2.9-billion budget for 2012, and drilling for more valuable commodities, results will not be instant. “Although the shift in investment is expected to only have a moderate impact on oil and NGL production growth this year, cash flow from our liquids production really begins to kick in by 2013,” Mr. Eresman said.
This delay is what prompted investors to sell their stock, said Phil Skolnick, an analyst at Canaccord Genuity.
“[The selloff] was the appropriate reaction,” he said. “They raised the budget by $600-million, yet cash flow for the year stayed flat...If you’re increasing your oil and liquids weighting, then the idea was we should see a dramatic improvement in cash flow, but you’re really not.”
Encana’s cash flow has held up this year despite gas temporarily dipping below $2 per million British thermal units because the company has healthy hedges in place. It will lose that advantage in 2013.
The company, which spun off its oil and refining assets in 2009, creating oil sands player Cenovus Energy Inc., expects a barrel of natural gas liquids will be worth 50 per cent of the price of a barrel of West Texas Intermediate crude, the North American oil benchmark.
In 2013, Encana expects natural gas liquids to be worth 40 per cent of WTI. These estimates are based on WTI trading at $95 per barrel in 2012, and $90 in 2013. Oil dipped below $80 per barrel Thursday.