Encana Corp. warned it will cut spending next year unless natural gas prices rally, a decision that shows the industry supply glut is weighing on the company's growth plans.
Randy Eresman, Encana's chief executive, outlined a shift to a more conservative 2012 budget plan on Wednesday, noting asset sales such as the $590 million (U.S.) dollar deal it struck yesterday will help provide a financial cushion while gas prices remain in the gutter.
Encana's announcement highlights just how difficult it has become for natural gas companies to operate, and how even the most experienced players can misread the market. The Calgary-based company, the second-largest natural gas producer in North America, is at risk of breaking its self-imposed debt guidelines, making asset sales necessary.
"We are currently planning for a reduced cap ex program for 2012 should gas prices remain stubbornly low," Mr. Eresman said at an investor conference in New York Wednesday.
"At this point in time, we don't feel it is appropriate to be growing production at a very high rate in this marketplace, to exaggerate the oversupply situation," Mr. Eresman said at the conference.
"During this period of continued low natural gas prices, we believe it is prudent to live within the boundaries of our cash flow generation. That is to say, our 2012 cap ex will likely be lower than our forecasted cash flow less dividends. Although we have just begun our annual budget process, this is what you should expect from Encana this coming year," Mr. Eresman said.
This breaks from Encana's 2011 budget strategy, where spending outpaced cash flow. The company expects to spend between $4.6-billion (U.S.) and $4.8-billion this year, with cash flow ranging from $4-billion to $4.3-billion. Encana pays out nearly $600-million in dividends each year.
Asset sales, Mr. Eresman said, will help buffer the company's balance sheet as natural gas prices remain low. Indeed, Encana said it agreed to sell its Piceance natural gas midstream assets for $590-million yesterday. Other packages are for sale in Alberta, British Columbia, and Texas.
"Expected proceeds of these divestitures will supplement our cash flow generation in the current low price environment, and provide us with further financial flexibility going in to 2012 and in to 2013," Mr. Eresman said.
Encana wants net divestitures to total between $1-billion and $2-billion per year. So far in 2011, it has sold about $1-billion, but made acquisitions worth $400-million. As a result, it needs to sell at least another $600-million in assets to reach the bottom end of its 2011 target. Encana said it is "on track to meet or exceed" this target.
Carrie Tait