Encana Corp., the natural gas giant rewriting its long-term plans, expects to lease more of its immense storehouse of royalty-free property to other companies, a move that will give junior companies access to a slew of oil and gas plays and spur the moribund deal market.
Doug Suttles, Encana’s chief executive, said in an interview he plans to put more emphasis on striking leasing agreements on these properties. They would make Encana a landlord, and save it the trouble of doing preliminary drilling in order to prove the properties’ potential.
The plan comes as Mr. Suttles works to put his stamp on the company. He will roll out a corporate strategy by the end of the year – blueprints that some expect could include cutting Encana’s dividend. Encana, like rival Talisman Energy Inc., needs dramatic change in order to win back investors and consistently post profits as natural gas prices remain soft.
Mr. Suttles, who took over in June, is already chopping Encana’s spending plan. The company, in its third-quarter results released Wednesday, said it plans to spend between $2.7-billion and $2.9-billion in 2013, down from its previous estimate of between $3-billion and $3.2-billion.
Encana holds roughly 2.8 million hectares of so-called fee title land in south central and west Alberta with limited fee title ownership in British Columbia. This land gives the company a free pass on paying provincial royalties. The company on Monday announced a three-year leasing deal with Manitok Energy Inc., an outfit that trades on the TSX Venture and Mr. Suttles wants to make a habit of it.
“This is an unrecognized asset that the company has,” Mr. Suttles said in an interview. “We’ve put a lot more emphasis on it this year, and I hope to see more of the Manitok-type deals over the coming months.”
For Encana, land leases create revenue without requiring upfront investments. But Encana’s financial reward from production on these properties would be less than if it developed them on its own.
“Typically it is more the smaller players that focus in this area,” Mr. Suttles said.
Encana announced a third-quarter profit of $188-million or 25 cents a share, up from a loss of $1.24-billion in the same frame last year. Encana recorded a profit last quarter, too, breaking its losing streak.
The Calgary-based company continues to shift its attention to so-called natural gas liquids – products like butane and propane. Some of these have proved more profitable than natural gas. It said its liquids production in the quarter climbed 92 per cent compared to this time last year, and it expects to meet its production target of an annual average of between 50,000 barrels per day and 60,000 barrels per day. Further, it expects to produce between 70,000 and 75,000 barrels per day by the end of the year.
Randy Ollenberger, an analyst at BMO Nesbitt Burns, applauded Encana’s slimmer budget and results in its liquids business. But the cheers will be restrained until Mr. Suttles presents his vision for the company. “We are expecting the company to significantly reduce capital spending in the U.S. while refocusing spending in Canada where the company has a stronger asset base and competitive advantage,” Mr. Ollenberger said in a research note.We are also anticipating a cut to the company’s dividend as part of its commitment to keep total cash outlays in line with cash flow.”