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Encana feels the heat as costs get steeper in the oil patch Add to ...

Natural gas giant Encana Corp. ’s cost outlook has climbed for both Canada and the United States, with the company arguing that the labour market is under pressure comparable to the height of the oil sands frenzy about four years ago.

The entire energy sector in North America is pinched when activity heats up in northern Alberta because of the sheer size of the oil sands. While Encana on Thursday said industry costs increases will stretch into the double digits in the United States this year, it believes its own costs will run up at about half the industry rate.

The sharp rise will further crimp producers which are already struggling as natural gas prices languish, with relief still years away, even in the eyes of bullish forecasters such as Encana. Optimists – again, Encana included – hope prices will begin to climb as companies are no longer forced to drill for gas in order to retain the rights to land holdings in the United States. However, today’s rising costs means weak companies may not last that long.

“The big oil price in the world is affecting the oil sands,” Mike Graham, head of Encana’s Canadian division, said during the company’s second-quarter conference call Thursday. “The labour market in Western Canada is definitely tight again, similar to where it was in 2007, early 2008, when we had the big run-up in oil prices.”

In Canada, costs will range from 4 to 6 per cent, he predicted. Oil and gas companies working in the United States, however, face a much more punishing situation. Costs will ring in between 10 and 12 per cent there, according to Jeff Wojahn, Encana’s leader in the United States.

The Calgary company, which ditched its oil sands and refining assets when it spun out Cenovus Energy Inc. in late 2009, believes it can cap cost increases between 5 per cent and 7 per cent, thanks to efforts such as buying steel, sand, and fuel on its own, and striking long-term contracts with service companies.

Encana made $176-million (U.S.) or 21 cents per share in the second quarter, compared with a loss of $457-million or 9 cents a share in the same quarter last year. The company touted its cash flow results, noting it raked in $1.1-billion or $1.47 per share. Cash flow hints at a company’s ability to fund its operations, and Encana beat some analysts’ expectations.

George Toriola, an analyst at UBS Securities Inc., in a research note said the natural gas company’s cash flow surprised analysts because of a 15-cent tax recovery, slightly better than expected production, and healthy “realized prices” on its American production.

Encana expects its cash flow and production grow by 5 to 7 per cent in 2011.

Hedges have helped natural gas companies like Encana stay in the black in light of low gas prices. Encana said it has about half of its production hedged for the next 18 months. For the last half of 2011, its hedge price is $5.75 per thousand cubic feet and its 2012 hedge is about $5.80 per Mcf.

Encana did not provide any information on its failed $5.4-billion joint venture agreement with PetroChina International Investment Co. Ltd., citing a confidentiality agreement. Encana originally said it wanted to strike the deal – which would have marked China’s largest investment in the Canadian oil patch – to speed development on some of its shale-gas plays. It is still looking for joint ventures, although not of the same size.

 

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