Encana Corp., the natural gas company that just paid up for an oil play, will have another shot at explaining its multibillion-dollar acquisition this week.
The Calgary-based company last week shelled out $3.1-billion (U.S.) for a slice of the Eagle Ford in Texas, a zone rich in oil and natural gas liquids. The market was pleased with the deal, but as the company reports its first-quarter earnings Tuesday, there is still room for clarification.
The market has done the math on the price: it looks great if you measure it on cash flow at the zone's first quarter production rates, but not so hot when compared to reserves or accounting for declining production. Encana has already said it will try to increase production through "optimization" techniques such as drilling more wells. It likes the property more than its former owner, Arizona's Freeport-McMoRan Copper & Gold Inc.
But not all of the 45,500 acres are in the heart of the play. The land in Wilson County, for example, is on the outskirts of the oil-rich fairway, noted Manuj Nikhanj, head of energy research at ITG Investment Research. Encana may want to elaborate on the potential it sees in the rocks beyond the proven strips of the play.
Investors will hear about oil and the company's race to jack up its crude and natural gas liquids production, but natural gas, which has been on rally, remains the heart of the company.
Encana is now producing natural gas from its Deep Panuke project, off the shores of Nova Scotia. It raked in some juicy prices for natural gas last quarter, owing to location. Analysts, as well as Encana executives, have mused on and off about whether Deep Panuke should have a permanent place in the company's portfolio of plays. Now that Encana added a sixth key play thanks to the Eagle Ford purchase, and is in the process of jettisoning its fee simple properties thanks to an initial public offering, Encana chief executive officer Doug Suttles may be more prepared to make the call on Deep Panuke's future.
Indeed, Mr. Suttles wants to keep the company focused. His original five favourites are the Montney in northeast British Columbia and northwest Alberta; the Duvernay in west central Alberta; the DJ Basin liquids play in Colorado; San Juan oil zone in northwest New Mexico; and the Tuscaloosa marine shale in Mississippi and Louisiana. The Eagle Ford makes six.
As well, the company is spinning off roughly 5.2 million acres of land into a new company, PrairieSky Royalty Ltd. Encana expects to rake in between $747.5-million and $861.3-million through the IPO and hold on to 75 per cent of the company.
Now that Mr. Suttles has cleaned up Encana's balance sheet and made a string moves that will define the company in the years to come, watch for clarity on where Deep Panuke fits.
Encana appears to be free of one other lingering concern: charges in Michigan it colluded with rival Chesapeake Energy Corp. in Michigan to keep land prices low during a land rush. Encana earlier this month pleaded no contest and settled for $5-million And so Encana is now Mr. Suttles' company. It is time to hear what he plans to do with the company he shaped, not the one he inherited.