"EnCana intends to further sharpen its focus on its industry-leading position in long-life North American natural gas and oilsands resource plays through the future disposition of its Ecuadorian and Gulf of Mexico interests. These combined transactions will focus EnCana as the leading North American natural gas producer and the premier in-situ oilsands developer," said Gwyn Morgan, EnCana's President & Chief Executive Officer. "We are pleased that our highly capable U.K. team will become a key part of another strong and respected Canadian independent oil and gas producer."
U.K. sale proceeds targeted to debt reduction, share purchase program EnCana expects that essentially no tax will be payable on the transaction. Proceeds from this and the future non-core divestitures will be directed to a combination of debt repayment and purchase of EnCana shares. EnCana intends to begin purchasing common shares pursuant to its current Normal Course Issuer Bid. The company's normalized debt-to-capitalization target is 35 percent.
EnCana expects to record an after-tax gain in excess of $1 billion on the U.K. asset sale, which is expected to close on or about December 1, 2004, and is subject to normal closing adjustments and regulatory approval. The Ecuador and Gulf of Mexico divestitures are expected to occur in 2005. In addition, EnCana plans to upgrade its portfolio each year through the disposition of mature non-core North American conventional assets.
EnCana is focusing on the future
"Conventional North American production has entered into a classic period of increasing costs and accelerating decline rates. We expect that onshore North America's future will be dominated by unconventional tight gas and oilsands, which we classify as resource plays. Resource plays represent a paradigm shift - in other words, unconventional thinking. For example, in contrast to conventional reservoirs, typically resource play decline rates and costs decrease, and cumulative booked reserves increase over time," Morgan said.
"Over a decade-long period, EnCana has built North America's strongest resource play position, and has become North America's number one natural gas producer and the low-cost in-situ oilsands producer. Creating shareholder value is all about focusing on competitive advantages and executing with operational and financial discipline. In fact, exploitation of our resource plays is the most profitable strategy in our portfolio and where we believe we can build the most value. Our strong balance sheet allows us to be a very disciplined seller. We will dispose of assets that do not fit our strategy and when we are satisfied we are maximizing value for shareholders," Morgan said.
Building an unconventional future
"We fully recognize that the Buzzard project is a world class development, with potential upside. However, the U.K. asset sale presents an opportunity to capture substantial immediate value for our shareholders at a time of high oil prices. Since the creation of EnCana two and a half years ago, we have developed a high level of confidence in our ability to produce sustainable profitable growth from long-life, low-cost natural gas and oilsands resource plays and have consistently and steadily tightened our focus on these plays because of their attractive returns and predictable low-risk growth. We are more convinced than ever that the future of oil and gas growth in North America resides in unconventional assets. It's what we know best and it is what we are best at," said Randy Eresman, EnCana's Chief Operating Officer.
Resource plays have plenty of room to grow
"Our large and growing portfolio of resource plays contains a long-term inventory of strong return exploitation opportunities in what we believe are North America's most prospective resource basins. EnCana's focus is on basin-centered sand, carbonate and coalbed natural gas accumulations in Western Canada, the U.S. Rockies and Texas, and in-situ recovery from our oilsands resources. We have been building resource play expertise on our legacy assets in Alberta for decades. Over the last five years we have expanded aggressively into British Columbia, the U.S. Rockies and more recently into Texas - a period during which the importance of unconventional reservoirs to North American supply was becoming increasingly apparent. EnCana's natural gas resource plays are characterized by unique geologic settings that have created huge contiguous occurrences of natural gas in low permeability formations. These plays have become increasingly economic with today's technology. EnCana's manufacturing-style resource play management approach, which focuses on scale, cost control and continuous learning, has contributed to EnCana earning its cost of capital at less than half of today's commodity prices. Our disciplined pursuit of these unconventional assets has enabled us to become North America's largest, lowest operating cost, natural gas producer. However, our 3 billion cubic feet of daily production represents only around five percent of the North American market, so there's plenty of room to grow," Eresman said.
"In the in-situ oilsands business, we have a wealth of experience and a successful track record in low-cost commercial production from our steam-assisted gravity drainage projects. We expect that these industry-leading projects will be a continuing source of value creation for the company," Eresman said.
Following the completion of this U.K. sale transaction and after the Ecuador divestiture takes place, 100 percent of EnCana's production will be from onshore North America. Natural gas and natural gas liquids (NGLs) will comprise about 80 percent of the company's production and an even higher portion of operating cash flow. Resource plays will represent about 75 percent of daily North American output, and this ratio is expected to grow steadily through a combination of mature conventional asset dispositions and deployment of capital into resource play development.
Growth outlook well beyond proved reserves
EnCana's future growth is underpinned by its 9.4 trillion cubic feet of proved gas reserves and 16 trillion cubic feet of Unbooked Resource Potential - collectively more than 25 trillion cubic feet of natural gas resources. At current production rates, this results in an expected resource life of more than 20 years. The company's oilsands lands hold more than an estimated 30 billion barrels of oil in place, sufficient for decades of growing production.
"We believe EnCana's existing huge unconventional North American oil and gas land holdings and the continuous flow of new concepts and ideas that our teams are delivering provide our shareholders with a depth and breadth of opportunity for predictable, reliable, profitable growth right here in North America, which makes EnCana a truly unique investment," Morgan said.
Other non-core assets
EnCana's Ecuador and Gulf of Mexico assets are valuable conventional properties that the company has moved to non-core status because they no longer fit EnCana's resource play focus. The Ecuador assets include interests in five Oriente Basin blocks which had average production of 77,100 barrels per day of oil, generated $252 million of operating cash flow, after hedging, in the first nine months of 2004 and contain an estimated 162 million barrels of proved reserves as of December 31, 2003, plus a 36.3 percent interest in the OCP Pipeline. In the Gulf of Mexico, successful exploration has resulted in a number of promising conventional oil discoveries, together with additional prospects contained on EnCana's extensive exploration licenses.
Revised sales forecast reflects resource play focus
Given the expected pro forma impact of the U.K. divestiture, EnCana has revised its 2005 sales forecast to between 4.7 billion and 5.0 billion cubic feet of natural gas equivalent per day, comprised of 3.35 billion and 3.50 billion cubic feet of natural gas and 225,000 and 255,000 barrels of oil and NGLs. Core upstream capital investment in 2005 is forecast to be between $4.6 billion and $5.0 billion, after allowance for expected inflationary pressures.
Summary of non-core assets
Gulf of Mexico interests
EnCana reports in U.S. dollars and according to U.S. protocols in order to facilitate a more direct comparison to other North American upstream oil and natural gas exploration and development companies. Reserves and production are reported on an after-royalties basis. All figures are in U.S. dollars unless otherwise noted.
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