Encana Corp.'s chief executive officer has backed down from his bullish spending plans for next year as oil prices crash just months after the company spent billions acquiring property as part of its turnaround ambition.
The company intends to spend between $2.7-billion and $2.9-billion (U.S.) in 2015, according to the budget it released Tuesday. Doug Suttles, on Nov. 12, told investors that Encana would spend "substantially" more in 2015 than the $2.5-billion to $2.6-billion it expects to hand over this year. The benchmark price for oil in North America has shed roughly 27 per cent between his aggressive prediction and Tuesday's budget. Oil closed at $55.93 a barrel Tuesday, up 2 cents. It has dropped nearly 50 per cent since the end of June.
Mr. Suttles's reversal indicates of how volatile the oil market has become. Encana, under his turnaround strategy, has shifted its attention – and cash – toward oil and natural gas liquids plays, rather than dry natural gas. Encana's competitors have done the same, but as oil drops, that strategy could sting. Citibank, for example, on Tuesday said natural gas may now be worth more than natural gas liquids as oil plummets.
Encana said it will spend roughly 80 per cent of its 2015 capital budget on four plays it considers rich in oil and natural gas liquids: the Montney, Duvernay, Eagle Ford and Permian basin. It predicts oil and natural gas liquids will make up 75 per cent of its cash flow in 2015.
"The margin we're receiving at these kinds of prices is still very high," Mr. Suttles said in an interview. With oil trading at around $70 a barrel, Mr. Suttles said the company's cost of production – which does not include acquisition, exploration and corporate expenses such as payroll – ranges between $35 and $55 a barrel of oil equivalent across its four key plays.
Mr. Suttles's more conservative tone on spending compared to just a month ago reflects the continued slump in energy prices.
"No question, they've reduced their capital spending expectations because prices have continue to fall," Randy Ollenberger, an analyst at Bank of Montreal, said.
By way of example, Arthur Grayfer, a Canadian Imperial Bank of Commerce analyst, expected Encana's capital expenses to ring in between $3-billion and $3.7-billion in 2015, according to a note published Tuesday.
Encana spent roughly $9-billion this year picking up land rich in oil and natural gas liquids. Commodity analysts at Citibank argue that oil and natural gas liquids may have lost their shine.
"Higher prices of natural gas liquids, due to their ties to oil, used to enhance the production economics of natural gas production," the analysts said in a research note Tuesday. "However, sharply lower oil prices have dragged down NGL prices to levels that natural gas may be more valuable after adjusting for heat content of the fuel."
The dividing line is roughly $60 a barrel of oil, according to the analysts. Encana anticipates raking in between $2.5-billion and $2.7-billion in cash flow next year. This assumes the North American benchmark for oil, known as West Texas intermediate (WTI), will trade at an average of $70 a barrel next year; and natural gas will be worth an average of $4 per million British thermal units.
Menno Hulshof, an analyst at Toronto-Dominion Bank, noted that the market's forward-looking price for oil in North America is $59 a barrel in 2015.
"Barring a near-term recovery in oil prices from these levels, we contend that [Encana's] budget may be subject to further downward revisions," he said in a note. "We view the 2015 budget as somewhat aggressive given the minor funding shortfall and the disconnect between its 2015 WTI oil price forecast and current [forward-looking] prices."
Encana expects to haul in $800-million in the first quarter thanks to asset sales, including cash from the previously announced sale of the majority of its Clearwater position in southern and central Alberta for $605-million (Canadian), Mr. Suttles said. The company is in "advanced" negotiations regarding midstream assets in the Montney region straddling the Alberta-British Columbia border, he confirmed Tuesday.