#encana's $850mn Departure From The Haynesville #shale Shows Oil Front-And-Center

By 25th August 2015 Industry News No Comments

Encana has been recalibrating its strategy amid the low oil price environment and per a liquids-weighted focus introduced by CEO Doug Suttles in 2013. Today, the company made a further pivot away from gas and towards liquids, announcing it has bid farewell to its total Haynesville position in northern Louisiana for $850 million.

Encana CEO Doug Suttles

The Canada-based independent E&P said Tuesday it is selling its Haynesville shale gas assets to GEP Haynesville, LLC, a joint venture formed by fund manager GSO Capital Parnters and GeoSouthern Haynesville. Encana said it will designate the funds generated by the sale to reduce debt.

Part Of A Bigger Shift

Last month, Encana updated the results of its recalibration efforts in light of the low price environment. In that update, the company highlighted its operations in its 4 key areas, toward which the it has allocated 80% of its 2015 capital program: the Permian, Eagle Ford, Duvernay and Montney. The company’s 2Q15 production increased more than 5% from the previous quarter, largely driven by its liquids-weighted assets in the Permian and Eagle Ford.

In February, Encana said it was reducing its 2015 Capex by $700 million to approximately $2.1 billion. Encana said its cash flow this year will range between $1.4 billion and $1.6 billion.

A Deal Months In The Making

Reports began to surface in April that Encana was exploring the sale of its Haynesville position in its effort to accelerate its liquids-focused transition.

In April, the company announced the completion of its sale of gas-gathering assets in Canada to Veresen Midstream. Its $6.8 billion acquisition of Athlon Energy last year gained it a foothold in the Permian Basin- the most prolific US oil-producing region.

The 2014 acquisition of Athlon Energy marked Encana’s entrance into the Permian

What GEP Haynesville Is Getting

During 1H15, Encana’s Haynesville assets produced an average 217 mmcf/d, contributed approximately 9% to companywide production and less than 2.5% to Encana’s first half operating cash flow, excluding hedges.

Encana’s Haynesville natural gas assets include approximately 112,000 net acres of leasehold, plus additional fee mineral lands. Encana operates approximately 300 wells in the area. Estimated year-end 2014 proved reserves were 720 Bcfe of natural gas.

Additionally, through the transfer of current and future obligations, Encana will reduce its gathering and midstream commitments, which will be substantially complete through 2020, by approximately $480 million on an undiscounted basis. Further, Encana will transport and market GeoSouthern’s Haynesville production on a fee for service basis for the next five years.

The deal is expected to close in 4Q15 with an effective date of January 1, 2015.

Management Comments

“This is another step in advancing our strategy. By further focusing our portfolio, we are making Encana more efficient as we proceed through the second half of 2015 and into 2016,” CEO Doug Suttles said.

“This transaction delivers significant proceeds that we’ll use to strengthen our balance sheet. In addition, it eliminates our midstream commitments in the Haynesville and captures ongoing revenue upside through a gas marketing arrangement. I’d like to congratulate GeoSouthern on securing a high-quality natural gas asset along with a talented, safety-conscious field staff.”

Overall Job Cuts: 1,400 Since 2013

Encana said in its 2Q15 report last month that it is allocating $58 million in 2015 for severance and transition costs as it continues a reorganization that yielded 200 job cuts in July in addition to the 1,200 cuts starting in late 2013.

The company added that it has already spent $30 million in 1H15, with a further $28 million to be paid out this year. Encana said that since late 2013 it has spent another $125 million, primarily on severance, as it reduced its headcount from its then ranks of 4,000 employees and 900 contractors.

CFO Sherri Brillon told investors on Encana’s 2Q conference call that overall job cuts have reached 1,400 since 2013.

The latest job cuts from the June total headcount of 3,500 total staff and contractors are per the aforementioned restructuring strategy designed to facilitate Encana’s growth “in any price environment,” company management said.

Encana’s “Liquids Progress” (Revisiting The 2Q Update)

Reflecting CEO Doug Suttles liquids-focused strategy, Encana reported liquids production of approximately 127,300 bpd- up 87% Y/Y.
Over 80% of capital invested in the company’s four most strategic assets, the Permian, Eagle Ford, Duvernay and Montney.
The company brought 59 new wells on production in the Eagle Ford and Permian late in 2Q, with another 76 planned in 3Q.
Encana reduced Eagle Ford drilling and completion costs by $1 million per well (18%) compared to 1Q15.
The company referred to pace-setting Duvernay wells with production rates of up to 2,000 bbls/d of condensate and 11.5 million cubic feet per day (MMcf/d) of rich gas after 27 days on production.
Encana reported significant expansion of liquids inventory in the Montney, with higher condensate yields in Dawson South and two recent Pipestone area wells each producing over 1,000 bbls/d.

Revisiting Suttles’ “From Natty Gas To Oil” Strategy

In a 2013 investor presentation, Encana CEO Doug Suttles outlined the company’s recalibration strategy:

Vision: Fundamentally, Encana seeks to become a leading NAM oil and gas resource play company via high quality rocks, scale and running room, operational excellence, and portfolio optionality;

Strategy: Encana’s strategy is to engage in a disciplined focus on generating profitable growth. As mentioned above, this will be realizable via the greater degree of capital allocated to five core growth, high return, and scalable assets, the acceleration of oil/liquids growth, and the reduction of cost structures and the achievement of efficiency improvements;
Goals: Encana’s primary goal is to grow shareholder value. The company hopes to achieve this by fostering a sustainable business model through the commodity cycle, focusing on cash flow per share growth, achieving an investment grade credit rating, paying higher dividends, and unlocking value from its massive resource base.

Encana’s 2013 – 2017 Strategy Scorecard; Source: Company Presentation