A new comprehensive and independent assessment of Encana Corporation's North American resource potential has confirmed an enormous inventory of natural gas that is more than sufficient to support doubling the company's production in the next five years.
"In this new energy paradigm, we expect natural gas supply to outpace demand and prices to be lower than recent historical averages. The natural gas game in North America has changed beyond what many imagined just a few years ago. Being a low-cost producer and holding large land positions in the most prolific unconventional natural gas basins, combined with a strong financial position, is more important than ever. That is how we have built our company and now we have confirmed, through external independent evaluation, the enormous resource potential that will underpin a new strategy," Randy Eresman, Encana's President & Chief Executive Officer.
"It has become increasingly obvious to us that with our financial strength combined with our huge, low-cost inventory of drilling opportunities and our proven capabilities, the greatest value proposition for our shareholders is to deliver a sustainably higher growth rate going forward. We are so convinced of our potential, in fact, that we have set the goal of doubling Encana's production over the next five years," Eresman said.
Vast resources sufficient to double daily production
Encana has one of the largest natural gas portfolios in North America – a huge land position of 12.7 million net acres across many of the continent's most prolific and lowest-cost resource plays, stretching from northeast British Columbia to Texas and Louisiana. The company's externally evaluated proved reserves are estimated at 12.8 trillion cubic feet equivalent (Tcfe) as of December 31, 2009, sufficient for close to 12 years of production at current rates of about 3 billion cubic feet equivalent per day (Bcfe/d). A recent independent assessment of the company's resource potential has assigned Encana a low estimate of an additional 16 Tcfe of economic contingent resources, which is more than 120 percent the size of Encana's proved reserves.
"By their definition, these low estimate economic contingent resources have the same technical certainty of recovery as proved reserves. The key difference is they are contingent on meeting some commercial criteria, which in Encana's case often comes down to the expectation that the timing of their development exceeds the five-year limit that would normally be used to classify them as reserves," Eresman said.
"Capital discipline has always been central to our decision making when it comes to funding organic growth or high grading our portfolio via acquisitions and divestitures. After years of applying our early entry strategy, often before competitors understood the potential, we have amassed huge contiguous land positions in core areas of many of the continent's most attractive unconventional plays. Our inventory of economic opportunities is better than ever. We are positioned to grow production profitably, despite a lower price environment, and capture market share from companies with higher cost structures. Encana is committed to increasing the value of every Encana share through capital appreciation and targeting a strong dividend," Eresman said.
Manufacturing approach and gas factories sustain cost competitiveness and strong returns
Encana has been a leader in creating a manufacturing business approach to the development of unconventional natural gas resources. A focus on continuous technological improvement is key to remaining among the lowest-cost producers. For example, advances in long-reach horizontal drilling, multi-stage hydraulic fracturing and continuous operational optimization have generated a seven-fold increase in the volume of natural gas produced for every dollar invested in the last three years in the Montney play in northeast British Columbia. Some of EnCana's highest efficiencies are achieved through its gas factories – multiple horizontal wells and centralized production facilities located on a single surface location, or pad. Encana is at the forefront of employing fit-for-purpose rigs, conducting simultaneous operations, leveraging economies of scale with bulk deliveries of sand and steel casing and developing specialized technical staff for this manufacturing process, which helps maximize margins and efficiencies across the company's resource base.
"We are still in the infancy of optimizing the efficiency of our gas factory approach and further improvements over time will help us maintain our position as one of the industry's lowest-cost producers," Eresman said. Encana reports in U.S. dollars unless otherwise noted and follows U.S. protocols, which report gas and oil volumes on an after-royalties basis.
Investing an additional $750 million in 2010 to build future production
Encana is increasing its capital investment this year by $750 million as a first step towards production growth. The company is now targeting an exit rate for 2010 of between 3.4 Bcfe/d and 3.5 Bcfe/d. The additional capital increases the company's total 2010 forecast capital investment to approximately $4.5 billion. About three-quarters of the additional capital is aimed at accelerating Encana’s land retention program in the Haynesville shale play of Louisiana and Texas and to begin to ramp up development activity across the company's large portfolio of assets.
"We have built Encana with a relentless focus on being a low-cost producer. As we accelerate our growth, we will remain focused on enhancing our innovative, value-driven culture, leveraging technological advancements and increasing our operational efficiencies to maximize margins in all price cycles. Our new, high-growth strategy is designed to capture market share by delivering new supplies at a highly competitive cost," Eresman said.
Diverse portfolio of natural gas plays sustains core production, fuels high growth rate
Encana's key resource plays, at various stages of development, represent an attractive and geographically diverse portfolio capable of delivering long-term sustainable growth. On its proved reserves and low estimate economic contingent resources alone, the company has about 23,000 net drilling locations. Under the company's best estimate for reserves and economic contingent resources, which includes two additional categories, the net drilling location count is estimated to increase to approximately 35,000. Lower growth plays at Jonah in Wyoming and Greater Sierra in B.C. are well positioned to offset natural declines through consistent, steady, long-term development. Advanced projects at East Texas, Piceance in Colorado and Bighorn and the company's coal bed methane (CBM) properties in Alberta will contribute to incremental growth from well-developed lands containing additional, untapped unconventional formations. Emerging shale and tight gas plays at Haynesville in Louisiana and Montney and Horn River in B.C. contain vast new resources sufficient to support Encana’s growth plans to double the company's production over the next five years.
Natural gas -- the clear energy choice
Natural gas has an important and expanded role to play in the future energy supply for the continent, addressing both energy security and growing environmental mandates. Recognizing that North American natural gas is now likely to be both more abundant and more affordable, there is an opportunity for natural gas to displace even more coal and imported oil and for it to become a much larger source of energy for power generation and transportation. A secure, affordable domestic energy supply is only one case for expanded natural gas use. It is also the cleanest burning fuel, emitting up to 25 percent less carbon dioxide than gasoline or diesel and is 50 per cent cleaner than coal when used for power generation. Burning natural gas emits virtually no sulphur dioxide, which is a major contributor to smog. Significant reductions in emissions can be achieved by broadly switching to natural gas as a fuel source.
"The rapid and revolutionary technological changes sweeping through North America's natural gas industry provide extraordinary new opportunities to power our economic growth with abundant, affordable supplies of clean natural gas. Expanding natural gas use will create thousands of jobs and generate new opportunities for public investment. The winners in North America's emerging natural gas economy will be all of us consumers, who have a cheaper and cleaner fuel to heat our homes, power our computers and fuel our vehicles," Eresman said.
Encana expands reporting on reserves and resources
To give investors a better understanding of Encana's asset base and growth potential, the company is today expanding how it reports on its estimates of reserves and resources. For the last number of years, Encana has disclosed proved reserves consistent with U.S. Securities and Exchange Commission (SEC) regulatory requirements. For year-end 2009, Encana also reported proved reserves based on a business case price forecast. Beyond that, Encana believes the additional information published today on its estimates of reserves and resources will give investors a better understanding of the size and quality of the company's inventory of economic opportunities, and its growth potential. That expanded disclosure includes the proved reserves already reported, plus probable and possible reserves, as well as economic contingent resources.
Economic contingent resources fall into three categories: low estimate (1C), best estimate (2C) and high estimate (3C). In determining their economic viability, the same commodity price assumptions are applied as estimating proved reserves. These contingent resources are not yet commercial due to contingencies such as the timing and pace of development, or the need for additional infrastructure. The low estimate is the most conservative category and carries with it the greatest degree of confidence – 90 percent – that these resources will be recovered. Encana's low estimate economic contingent resources are estimated at about 16 Tcfe, which the company believes is more than sufficient to support doubling Encana's production in five years. Encana’s estimated volumes of reserves and economic resources are outlined in the table below. This robust resource base is concentrated in many of North America’s lowest-cost natural gas basins.
Continued focus on capital discipline, risk management, financial strength and flexibility
Encana has a strong balance sheet, with 100 percent of its outstanding debt composed of long-term, fixed-rate debt with an average remaining term of more than 13 years. The company has upcoming debt maturities of $200 million in 2010 and $500 million in 2011. At December 31, 2009, Encana had $4.9 billion in unused committed credit facilities. With Encana's bank facilities undrawn and $2.5 billion of cash and cash equivalents net of current tax obligations on the balance sheet at year-end 2009, the company's liquidity position is extremely strong. Encana is focused on maintaining its investment grade credit ratings and on capital discipline and financial flexibility. Encana targets a debt to capitalization ratio of less than 40 percent and a debt to adjusted EBITDA ratio of less than 2.0 times.
Encana has hedged approximately 2 Bcf/d of expected 2010 natural gas production at an average NYMEX price of $6.04 per Mcf. In addition, as of March 9, 2010, Encana has hedged approximately 1 Bcf/d of expected production for the calendar years of 2011 and 2012 at an average price of about $6.50 per Mcf. This price hedging strategy increases certainty in cash flow to help Encana meet its anticipated capital requirements and projected dividends. Encana continually assesses its hedging needs and the opportunities available prior to establishing its capital program for the upcoming year.
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