The writing on the wall at Encana Corp. couldn’t be any clearer if CEO Doug Suttles grabbed a black marker himself and scrawled on the Bow, the gas producer’s gleaming new Calgary office tower.
Big cuts are coming as Mr. Suttles sharpens Encana’s focus to deal with a seemingly-endless streak of low natural gas prices and concentrates its spending on the best prospects offering the highest returns.
The former BP PLC executive has said he aims to put profitability before production gains. That can only mean reductions among the 4,000 staff as capital gets moved away from assets that don’t make the grade.
He has also served notice that the dividend is anything but sacred as the company rethinks what it does with the cash generated from its operations. At least one analyst has predicted it could get halved next year. That would save about $300-million (U.S.).
All will become clear by the end of the year, the target for the roll-out of Encana 3.0. I’m going with the 2009 spinoff of Cenovus Energy Inc., the oil sands producer, as 2.0. That version proved to have a few bugs.
The new CEO’s detailed review of the operations is being pushed along by an internal team, a consulting company and two banks. An early revelation for Mr. Suttles was that Encana is putting money into 28 separate projects. That’s way too many, he told investors a few weeks ago.
Mr. Suttles, a third-generation Texas oil man, has no baggage at Encana or its predecessor companies, which is one of the reasons that the board hired him in June following a lengthy search to replace Randy Eresman, who left in January. It did not bring him in to rearrange the furniture.
This week, he began by pruning at the top. He chopped the number of senior executives who report to him, some with decades of service, and scrapped a structure that separated the U.S. and Canadian operations. Now, there’s a chief operating officer, overlooking all the technical and economic aspects of the highly specialized commodity business that has delivered more than a few knocks to Encana and its shareholders in recent years.
Count on this being a glimpse into more drastic things to come as Mr. Suttles seeks to pull the stock price out of the doldrums, where its been for nearly 2-1/2 years. For the company that was, briefly in the last decade, Canada’s most valuable corporation, it can’t be just about getting smaller.
There’s more at stake than just staging a turnaround at an energy producer. Many people in western Canada still see Encana as the home team, and like to engage in armchair quarterbacking when it’s facing trouble. That is a holdover from its roots as an amalgamation of PanCanadian Energy, which developed oil and gas on vast lands tied to the transcontinental railway, and Alberta Energy Co., which was created by the provincial government. The result was one of the industry’s most enviable land spreads and a draw for some of the industry’s best professionals.
Under former CEO Eresman, Encana underestimated how long North American gas prices would stay low due to the shale revolution it helped start. It was late to shift its efforts to producing “wet gas” that fetches a higher value. That led to a series of moves, including asset sales, production shut-ins and joint ventures, that left the impression that strategy was being written on the fly.
Last year, Mr. Eresman disappointed the market by saying that the way to “transition the portfolio” to more oil and gas liquids was to overspend cash flow, then make up the difference by selling assets. He never got the chance to play that one out.
It is clear asset sales alone won’t be the silver bullet. Encana and other large Canadian energy companies, including Talisman Energy Inc., have tried for years to rekindle old magic with investors by earmarking billions of dollars worth of properties for divestiture. The shares have failed to respond.
The market wants more, including a solid plan for dealing with a shifting commodity environment, operating in tight margins and capitalizing on major liquids-rich resource plays like the Duvernay in Alberta.
The language Mr. Suttles uses is telling. He’s said the company needs “radical” change. He describes the process for determining which projects get money as “broken.” Don’t expect his plan for fixing Encana to be subtle.