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Encana natural gas pipeline in northeastern B.C.
Encana natural gas pipeline in northeastern B.C.

Encana retreats from ambitious natural gas strategy Add to ...

Encana Corp. is pulling back from its aggressive plan to double natural gas production, admitting its ambitions have been trumped by the industry’s supply glut and a predicted rally that hasn’t materialized.

Encana chief executive officer Randy Eresman, the architect of the growth strategy, said the company is now diverting time and money toward more lucrative products such as crude oil and natural gas liquids in order to compensate for the weak natural gas market.

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The retreat by Encana, a powerhouse in the North American natural gas industry, demonstrates just how hard energy companies are being pinched by low gas prices. As the industry heavyweight revamps its growth and spending plans, the outlook is grim for many smaller companies short on financing and lacking a backup plan.

Even as natural gas prices dropped over the last year, Mr. Eresman remained steadfast in Encana’s ability to hit its growth target. Now, investors say Mr. Eresman’s move in late 2009 to carve out Encana’s oil assets into a new company, Cenovus Energy Inc., shows the downside of focusing on a single commodity.

A year ago, when Encana unfurled the plan to double conventional gas production in five years, it hoped that abundant inventories of gas would be steadily worked off as demand firmed. Today, however, the industry’s supply and demand fundamentals remain little changed.

Encana reported sharply weaker results for the first quarter, earning $78-million (U.S.), or 11 cents per share, down from $1.5-billion, or $1.96, quarter last year. Cash flow dipped 19 per cent.

“We’ve not abandoned our goal to double our size on a per share basis, we’ve just accepted it may take a little longer than it originally planned to achieve it,” Mr. Eresman said in a conference call. “Unfortunately, a full North American economic recovery did not occur as quickly as expected and natural gas prices retreated further at a time when it was clear natural gas supply was growing rapidly in North America.

“The combination of these two factors has lead to significantly lower short-term North American natural gas prices and has had a major impact both on Encana’s near-term ability to generate cash flow and our long-term price expectations,” he said. “This in turn has impacted our program economics and long-term development planning.”

When the plan was announced, Encana expected gas to trade at around $6 to $7 per thousand cubic feet on the New York Mercantile Exchange over the long term. On Monday, Mr. Eresman said the company is now forecasting $6 per Mcf in the long-term. It now hovers around $4 per Mcf.

At the time, the goal was to increase production by about 14.4 per cent a year over five years, up from its previous expansion rate of about 10 per cent a year. Mr. Eresman knew investors, analysts and even competitors questioned the viability of his plan, but he argued Encana’s costs were lower than observers realized and that, coupled with Encana’s forecast for gas prices to bounce back, would make it possible.

This is the first time Encana has made an outright admission that the growth plan has stalled. The company now plans to direct $1-billion toward oil and natural gas liquids projects. It said it ramped up exploration and development on its 1.7 million acres which hold these products, and is building necessary processing facilities for the natural gas liquids business.

Natural gas liquids include products such as propane, butane and ethane that mix with gas, depending on the reservoir. Natural gas liquids represent only a sliver of Encana’s production, but Mr. Eresman said he wants to increase that business “significantly … over the next few years.”

Laura Lau, an energy and resources fund manager at Sentry Select Capital Corp. in Toronto who has long criticized Mr. Eresman’s plans, said this diversification reflects not only the drop in natural gas but the strength of what were often viewed as mere byproducts of natural gas production.

“Encana has been slow going on that bandwagon,” she said.

Ms. Lau said Mr. Eresman’s move to shift Encana’s oil assets into a separate company, Cenovus, shows “the risk to having all your eggs in one basket.” Oil prices have surged in the past year, and Encana gave up some of the best steam-assisted oil gravity drainage oil sands properties in the deal, she noted.

Mr. Eresman, however, said he would not change the structure of the deal and would do it again today.

Talisman Energy Inc. also tinkered with its unconventional natural gas blueprints in December when it partnered with South Africa’s Sasol Ltd. in a $1.05-billion (Canadian) deal tied to assets in British Columbia. As part of the effort, the pair is exploring whether it makes sense to build a natural-gas-to-liquids facility, which would transform gas to products like diesel, giving companies a way to develop their properties while dodging low prices.

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