September 16, 2011 / 2:18 PM / in 6 years

Encana chief seeks patience after prices sag

CALGARY, Alberta (Reuters) - Investors in Encana Corp should be patient while Canada’s biggest natural gas producer unlocks richer reserves in its long-held producing lands and in newly acquired ones, its chief executive said on Thursday.

Encana is developing three new plays with potential for liquids-rich gas and oil in Canada and the United States and expects to be in a position within the next year to offer some forecasts of their production potential, Encana CEO Randy Eresman said in an interview with Reuters.

The shift to higher-value liquids is just one of several initiatives the company has undertaken to deal with a lengthy malaise in prices for dry gas.

Eresman conceded Encana could have moved more quickly on that front. “But it’s not the way we make decisions,” he said. “Historically, our decisions have been pretty solid, and I’d say just give us some time to do these things - the balls in the air will come back in hand again.”

Shares in Encana have fallen about 22 percent in the past 12 months, with much of the drop this summer.

Eresman attributed it partly to disappointment over the collapse of the C$5.4 billion ($5.5 billion) joint venture with PetroChina after more than a year of talks.

That was aimed at driving production growth at the company’s Cutbank Ridge, British Columbia, holdings while limiting use of its own capital. Other joint ventures are in the works, including one for the same region, although it is offering less control than what PetroChina sought.

“That did disappoint a lot of investors and disappointed us as well, partly because it took so much time and partly because of the need to put that into the public domain,” he said.

“We’re just sucking it up and moving forward on what we think is the right thing for shareholders - going back to the original premise, which was that our resource inventory is so large that we cannot demonstrate economic value for them without doing a JV structure or sale of the asset.”

Encana’s newer plays with liquids-rich or oil potential include the Duvernay in Alberta, Collingwood in Michigan and Tuscaloosa Marine shale in Louisiana and Mississippi.

Existing assets also have liquids potential, including the Deep Basin area of Alberta, where liquids output is expected to triple in the next two years from the current 10,000 barrels a day, Eresman said.

Such output currently makes up about 5 percent of the company’s total, but accounts for 15 percent of its revenue.

However, not all liquids plays make sense for Encana, he said. It passed on opportunities, for example, to jump into the Eagle Ford shale region of south Texas, where several companies have amassed large land positions, creating a boom.

“Something that is not well understood by the general public is that these plays have different cost structures, and just because they are liquids-rich it doesn’t necessarily mean they are economic,” he said.

“They still have to compete in our portfolio - that’s the one part that sometimes seems to get a miss. We’re not done yet driving down costs on our natural gas plays either.”

Encana aims to get costs down on all its plays to $3 per thousands cubic feet while seeking cost of capital returns below a New York Mercantile Exchange price of $4 per mmBtu.

It has already achieved that in the Montney region of British Columbia and has a “line of sight” on it in the Haynesville shale of Louisiana and the Deep Basin, he said.

He said he did not foresee the extent of the gas-price trough when the company spun off its oil sands operations into Cenovus Energy Inc in late 2009 so it could concentrate on its massive gas resources.

The initial plan was to spend $6 billion a year, assuming long-term prices of gas $6-$7 per mmBtu. It is now planning on the assumption of $5-$6 per mmBtu.

“It’s had an erosion of our cash flow generating ability,” he said.

Through proceeds from its divestitures, Encana aims to get its debt levels back to a more comfortable 1.6 times annual cash flow around the end of the year, from the current level of about two times, Eresman said.

($1=$0.98 Canadian)

Editing by Janet Guttsman

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