ENCANA SHIFTS AWAY FROM NATURAL GAS

For background, see my July 27, 2010 post NATURAL GAS PRICES LOOK SET TO DECLINE IN COMING YEARS. Henry Groppe has lost an ally.

Encana Corp. (ECA-T31.27—-%) is pulling back from its aggressive plan to double natural gas production, admitting its ambitions have been trumped by the industry’s supply glut and a predicted rally that hasn’t materialized.

Encana chief executive officer Randy Eresman, the architect of the growth strategy, said the company is now diverting time and money toward more lucrative products such as crude oil and natural gas liquids in order to compensate for the weak natural gas market.

The retreat by Encana, a powerhouse in the North American natural gas industry, demonstrates just how hard energy companies are being pinched by low gas prices. As the industry heavyweight revamps its growth and spending plans, the outlook is grim for many smaller companies short on financing and lacking a backup plan.

Even as natural gas prices dropped over the last year, Mr. Eresman remained steadfast in Encana’s ability to hit its growth target. (…)

A year ago, when Encana unfurled the plan to double conventional gas production in five years, it hoped that abundant inventories of gas would be steadily worked off as demand firmed. Today, however, the industry’s supply and demand fundamentals remain little changed.(…)

“We’ve not abandoned our goal to double our size on a per share basis, we’ve just accepted it may take a little longer than it originally planned to achieve it,” Mr. Eresman said in a conference call. “Unfortunately, a full North American economic recovery did not occur as quickly as expected and natural gas prices retreated further at a time when it was clear natural gas supply was growing rapidly in North America.(…)

When the plan was announced, Encana expected gas to trade at around $6 to $7 per thousand cubic feet on the New York Mercantile Exchange over the long term. On Monday, Mr. Eresman said the company is now forecasting $6 per Mcf in the long-term. It now hovers around $4 per Mcf.(…)

This is the first time Encana has made an outright admission that the growth plan has stalled. The company now plans to direct $1-billion toward oil and natural gas liquids projects. It said it ramped up exploration and development on its 1.7 million acres which hold these products, and is building necessary processing facilities for the natural gas liquids business.

Natural gas liquids include products such as propane, butane and ethane that mix with gas, depending on the reservoir. Natural gas liquids represent only a sliver of Encana’s production, but Mr. Eresman said he wants to increase that business “significantly … over the next few years.”(…)

Full Globe & Mail article

 

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