Encana's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Encana Corporation (ECA)

Encana Corporation (NYSE:ECA)

Q4 2012 Earnings Call

February 14, 2013 1:00 pm ET

Executives

Ryder McRitchie – Vice President, Corporate Communications & Investor Relations

Clayton H. Woitas – Interim President and Chief Executive Officer

Sherri Brillon – Executive Vice-President and Chief Financial Officer

Michael G. McAllister – Executive Vice-President, Encana Corporation & President, Canadian Division

Jeff Wojahn – Executive Vice-President and President, USA Division

Analysts

Greg Pardy – RBC Capital Markets

George Toriola – UBS

Matthew Portillo – Tudor, Pickering, Holt & Co.

John Herrlin – Societe Generale

Mike John – First Energy

Bryan Singer – Goldman Sachs

Peter Ogden – Bank of America Merrill Lynch

Mark Polak – Scotiabank

Menno Hulshof – TD Securities

Phil Plovanic – Canaccord Genuity

Bob Brackett – Bernstein research

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Encana Corporation's Fourth Quarter and Year-End Results 2012 Conference Call. As a reminder, today's call is being recorded. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions) For members of the media attending in a listen-only mode today, you may quote statements made by any of the Encana representatives. However, members of the media who wish to quote others who are not speaking on this call today, we advise you to contact those individuals directly to obtain their consent. Please be advised that this conference call may not be recorded or rebroadcast without the expressed consent of Encana Corporation.

I would now like to turn the conference call over to Mr. Ryder McRitchie, Vice President of Investor Relations and Communications. Please go ahead, Mr. McRitchie.

Ryder McRitchie

Thank you, operator, and welcome everyone to our discussion of Encana’s fourth quarter and year end results for 2012. Before we get started, I must refer you to the advisory on forward-looking statements contained in the news release, as well as the advisory on Page 39 of Encana’s Information Form dated February 23, 2012, the latter of which is available on SEDAR. In particular, I want to draw your attention to the material factors and assumptions in those advisories.

Encana reports its financial results in US dollars. Accordingly, any reference to dollars, reserves, resources or production information in this call will be in US dollars and after royalties unless otherwise noted.

Assuming you’ve all read our news release, we will keep our prepared remarks brief and to the point in order to allow time for questions. Following our conference call this morning, we will be posting an updated corporate slide deck to our website and I would encourage everyone to have a look at this complementary disclosure.

The agenda for your call this morning will begin with Clayton Woitas, Encana’s Interim President and CEO, discussing the company’s 2013 guidance, 2012 reserve results, and then update on the company’s strategic outlook; Sherri Brillon, Chief Financial Officer, will then discuss our 2012 financial results and guidance for 2013; we’ll then finish with Mike McAllister, President for the Canadian Division; and Jeff Wojahn, President for the USA Division discussing the 2012 divisional operating results and 2013 plans.

I will now turn the call over to Clayton Woitas, Encana’s Interim President and CEO.

Clayton H. Woitas

Thank you, Ryder, and thank you everyone for joining us today. I’ll begin by discussing our 2013 guidance. You have noticed a number of changes in our formal guidance for this year versus the projections we’ve provided last June at Investor Day, I would like to address these.

First, we set our 2013 upstream capital investment to range between $2.9 billion and $3.1 billion, a reduction of approximately $1 billion from our June 2012 initial projections. Encana’s 2013 capital investment reflects a measured pace of development. It also reflects the success we’ve had with our joint venture initiatives and the carrying capital, our cash that the company’s joint venture partners have agreed to pay in excess of their ownership exists as part of their commitments under their agreements.

Carry capital has among other things improved the company’s capital efficiency, enabling us to do more with less of our own money. Over the next five years, Encana’s total carry capital is estimated to be approximately $3.8 billion. Second, our 2013 liquids production guidance is expected to range between 50,000 and 60,000 barrels per day, potentially doubling Encana’s 2012 average volumes of 31,000 barrels per day.

However, our 2013 guidance is a reduction of approximately 10,000 barrels per day from our June projections. This was a result of both our reduced capital number and the cutback were approximately 3,000 barrels per day of ethane volumes in the US Division were moved as we are often largely in ethane rejection mode given current market prices for this product.

Third, our 2013 net divestiture guidance as far as forecast the range between $500 million and $1 billion. Last year, we over delivered on our divestiture targets receiving more than $4 billion in divestiture proceeds and upfront joint-venture cash. This combined with our lower capital figure positions us to exit 2013 with significant cash balances.

There are three cornerstones to Encana’s 2013 plans. First and foremost, capital discipline and profitability are priorities. Our capital investment plans allocate about $440 million to early light oil and liquids rich natural gas plays. Encana has established large recourse positions in these plays. We have successfully initiated an evaluation program with the resultant oil production. Now by efficiently deploying our technical expertise, we are confirming commerciality. Second, we intend to maintain financial strength and flexibility. Third, we are focused of becoming the lowest cost developer and producer of natural gas.

At the end of the day, the oil and gas industry is the commodity business and while we can’t control the prices for natural gas, oil or natural gas liquids, we can exit discipline on our cost. We intend to increase our margins without depending on the natural gas price recovery. In addition to our year-end financial and operating results, Encana has also released this morning its 2012 reserve results.

Proved reserve additions excluding price revisions were 2 trillion cubic feet equivalent and production replacement was approximately 170%. Horn River, Peace River Arch, Cutbank Ridge, Bighorns, and DJ Basin were the primary growth drivers. In accordance with Canadian protocol disclosure, proved reserves totaled approximately 13.1 trillion cubic feet equivalent or an after royalties basis at year end 2012, down by about 1.2 trillion cubic feet or 8% versus 2011 due primarily to the impact of lower natural gas prices.

Joint venture investors also reduced proved reserve quantities by about 870 billion cubic feet equivalent. However, the company experienced robust year-over-year growth of more than 80% in liquids proved reserves. Additions and revisions included approximately 125 million barrels of crude oil and natural gas liquids in 2012 resulting in improved liquid reserves of approximately 240 million barrels.

Proved undeveloped reserves or PUDs account for 40% of total proved reserves and are scheduled to be converted to proved developed reserves within the next five years. The average future development costs associated with our PUDs is approximately $1.60 per thousand cubic feet equivalent compared to $1.94 in 2011. All of our reserves and economic contingent resources continue to be 100% externally evaluated by Independent Qualified Reserves Evaluators not just reviewed or audited, posted to our website, under the guidance page, a complete update by resource play of Encana’s year end 2012 reserves and resources. As already mentioned, we achieved great success in attracting joint venture partners in 2012, and we expect strong interest in our Canadian and U.S. joint venture offerings in 2013.

I will now turn the call over to Sherri Brillon, our CFO.

Sherri Brillon

Thanks, Clayton, and good morning, everyone. First, a few words regarding our 2012 results, Encana recorded cash flow of approximately $809 million, or $1.10 per share for the fourth quarter of 2012.

Full year 2012 cash flow remains strong, up more than $3.5 billion, or $4.80 per share, in line with corporate guidance. Cash flow for 2013 is expected to range between $2.3 billion and $2.5 billion, based on NYMEX natural gas prices of $3.75 per thousand cubic feet, WTI is $95 per barrel and Encana’s hedge position detailed in this morning’s news release.

As Clayton highlighted, maintaining in Encana’s financial strength and flexibility through capital discipline is a priority. Our 2013 upstream capital investment has been set between $2.9 billion and $3.1 billion. We planned to invest approximately 80% of our operating capital in light oil and liquids rich natural gas opportunity in the DJ Basin, the Piceance, Cutbank Ridge, Peace River Arch, Bighorn and our emerging plays. This investment plan is set out of measured conservative pay that provides us with the time and perspective we need to evaluate the profitability of our investments.

We want to see success and a clear line of excitement to virtuality in our emerging liquid place before committing further investment. As well in 2013, we expect to invest about $600 million or about 20% of our operating capital in our dry natural gas assets with a view to maintaining Encana’s low cost focus and industry leading natural gas business.

Clearly, Encana has a significant natural gas asset base and by allocating only a fraction of our 2013 capital directly to our natural gas assets means that we are only are very best dry natural gas assets. Dry gas capital has been allocated to plays supported by joint venture or that have very low cost structure.

Encana’s strong liquidity position resulting in part from the company’s success and closing several significant joint venture transactions last year serves as the solid foundation for Encana’s 2013 plan. We exited 2012 with about $3.2 billion in cash on our balance sheet and just last Friday, we closed the sale of our interest in Kitimat.

Our cash position provides us with the financial reserves that needed to bridge the gap between our 2013 capital spending and upcoming $500 million debt maturity this October relative to our forecasted cash flow for the year. In addition to our cash position, we have about $5 billion of undrawn bank lines committed until 2015. So we have tremendous financial flexibility.

I‘m confident that our 2013 budget provides Encana with a financial and operational strength it means to profitably develop its resource base. We will remain focused on continuing to reduce cost structures in order to grow the margins of our business.

I will now turn the call over to Mike McAllister.

Michael G. McAllister

Thanks, Sherri and good morning. I’ll start this morning with the discussion of joint ventures in the Canadian Division as I want to convey the significance of these transactions. Last year, we closed three material joint venture transactions in Canada. Mitsubishi acquired a 40% interest in the Cutbank Ridge holding undeveloped land Montney lands for a total of $2.9 billion Canadian. We sold 49.9% working interest in our Duvernay asset for a total of $2.18 billion Canadian to PetroChina. And we sold 32.5% gross overwriting royalty on the portion of our coalbed methane resources to the Toyota Tsusho Corporation for about $600 million.

The total expected proceeds from these deals are approximately $5.7 billion Canadian with $2.7 billion or about half being received in upfront cash. In all of these deals, Encana retained operatorship of the underlying property and in the case Cutbank Ridge deal no existing production was sold. What this means for Encana cannot be overstated, including joint ventures closed in earlier years such as our coal gas form out, the total to 2013 divisional carry capital is expected to be $515 million.

In the context of our operations, this helps to improve capital efficiency, shorten resource development timelines, lower overall cost structures and improved rates of return and present volume metrics.

Next, we'll touch briefly on our operations. Last year in Cutbank Ridge, we drilled 35 Dawson Creek Montney wells, where our resource play hub model continues to deliver cost savings driven by reduced drilling times and more efficient completions. The use of limited entry slick water completions has resulted in cost structures going down by 22%, or simultaneously improving unconstrained IPs by 50% in this area. Returns on our Montney play currently range between 30% to 40% and we expect our supply cost to be in the $2.70 per 1,000 cubic feet equivalent on an unleveraged basis. If we include the carry capital, our supply costs are expected to be come in below $2.

More importantly, we have transferred Cutbank regional earnings to many of our emerging plays including the Duvernay. In the fourth quarter, we drilled two of the longest laterals in the play at 6,770 feet in Kaybob and 7,280 feet in Willesden Green. We successfully placed 39 slickwater fracs in our latest Kaybob well and 40 fracs in our latest Willesden Green well.

Finally, I will touch briefly on our 2013 plans for Bighorn and Peace River Arch as we’ve allocated about 300 million and 480 million respectively to these plays. Bighorn is expected to contribute roughly 5,000 barrels per day of liquids growth this year through organic growth and deep cut processing in the (inaudible) facility. Aided by a significant associated liquids volumes, Bighorn supply costs are currently about $2 per 1,000 cubic feet equivalent.

Peace River Arch area is expected to add about 2,000 barrels per day of incremental liquids growth to deep cut processing at Gordondale. Our ethane volumes from both facilities are under long-term contracts that supported Encana’s decision to extract these volumes.

I will now turn the call over to Jeff.

Jeff Wojahn

Thanks, Mike. I will first talk about divisional joint ventures and then turn to 2012 results and major 2013 strategic initiatives for the USA Division. Currently and historically, joint ventures play a significant role in the development plans that we have for Jonah field, the Piceance Basin and the Denver-Julesburg Basin.

For 2013, we expect our joint venture partners to invest approximately $265 million in carrying capital in these assets that directly benefit Encana. Over the life of our agreements, we expect to receive between $2.6 billion and $2.8 billion in the form of carried costs. Importantly, in all of our joint venture arrangements, we have retained operatorship of the assets.

Moving on to our operations; our DJ Niobrara play has proved to be highly commercial according as the rate of returns of above 50% and 12-month capital efficiencies of about $4,500 per thousand cubic feet equivalent per day. We are ideally situated in the heart of the Waterberg field and we are now drilling wells with lateral length up to 7,000 feet. We are trying to invest about $230 million in the DJ Basin this year with this play contributing approximately 8,500 barrels per day of liquids production in 2013.

In the USA Division emerging plays, we plan to invest close to $300 million largely within the first six months of this year. Our goal is to demonstrate commerciality. Let’s begin with our Mississippian Lime asset. On the Oklahoma side of our Mississippian acreage, we have drilled seven wells to-date, completed six and flow back on these wells commenced in January. Once we have full results on our Oklahoma program and initial results do look promising, we determine it will proceed further with this play.

Moving to Mississippi in the Tuscaloosa Marine Shale, well performance continues to improve driven by longer lateral length and enhanced completion designs, one that we’re calling TMS-90 which means we are pumping over 90,000 pounds of sand per cluster and four clusters per stage. Our next step is to utilize even larger completions, while we are calling it TMS-150 or 150,000 pounds of sand per cluster, to improve well performance further.

We are budgeting our wells at approximately $15 million in 2013, and we expect to be able to further reduce these costs as we move to larger scale operations. Goodrich Petroleum’s recent well across the 12H-1, which we have a 25% working interest in, was completed using the TMS-90 design. This well directly offsets our acreage and extends prospective, approximately 15 miles west from Montana’s Jackson 4 H-2 well.

Across the well, we delivered initial castrate higher than 1,100 barrels of oil equivalent per day, which is encouraging in line with some of our best results. This asset has great potential for Encana, ideally situated to receive Louisiana light sweet crude pricing. We feel that we are very close to achieving commerciality on this play.

Moving to Texas and the Eaglebine play, we are targeting the lower laminated zone and lower Woodbine sands. We’re finding similar correlated results between pumping larger completions and achieving higher estimated ultimate recoveries. Well costs are now ranging between $7 million and $8 million and well performance continues to improve. Our Lorain Marine one and two wells testing the lower laminated shale, average 30-day initial productivity of 483 barrels per day, and 387 barrels of oil equivalent per day, respectively. The Weaver I and II wells testing the lower Woodbine cotton sands are producing between 450 barrels and 500 barrels of oil per day in the first seven days of production. As with Tuscaloosa Marine Shale, our strategy is to improve commerciality to increase completion intensity practices, as well as continuing reducing costs as we learn operational capabilities.

Turning to Louisiana and the Haynesville shale; in the Haynesville play, the Louisiana Office of Conservation amended its rules to allow drilling at cost unit wells with consent of simple majority of owners and units affected by drilling. This policy change enabled Encana to develop its acreage position with lateral length averaging 7,500 feet and six wells per 960 acre unit, thereby reducing capital requirements and significantly improving program metrics. We have allocated about $270 million to our Haynesville asset in 2013 to demonstrate the robust economics of our advanced well designs.

I will now turn the call over to Clayton for closing remarks.

Clayton H. Woitas

Thank you, Jeff. As I’ve said before during my 10 year as interim CEO, we expect to build on operational momentum and focus on cost reduction. While we have demonstrated success, additional capital will be applied. I’m confident about the opportunity in front of us as we continue to advance the strategy. I can assure that Encana senior management team and the Board of Directors made committed to doing the right things for the long-term benefit of the company and our shareholders.

Before closing a brief word about our CEO search. The Board of Directors has initiated an executive search for a new President and CEO, which we anticipate may take three to six months. When making a change of this magnitude importance, we want to ensure we have closely examined the full suite of potential candidates. We want to get the best possible candidate for the job whether that person is external or internal to the company. In the interim, I will the lead the senior management team and do all that I can to ensure this transition period run smoothly and in expeditious manner.

We will be closely monitoring our costs and investing in our highest return projects to maximize the impact of the dollars that we spent. Profitability, capital disciplined, maintaining Encana’s financial strength are striving to be the lowest cost natural gas developer and producer are priorities.

Thank you very much for joining us today. Our team is now standing by to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will now begin the question-and-answer session and go to the first caller. Your first question comes from Greg Pardy from RBC Capital Markets. Your line is open.

Greg Pardy – RBC Capital Markets

Hi, thanks. Good afternoon, and quite a long time no talk. Just a couple of questions; the big one that’s coming up is just the ramp up in the Haynesville up to five rigs. Jeff, I’m just wondering if you can talk a little bit about the supply costs now with the longer laterals and whether or not any of the ramp up and activity is related to becoming LNG feedstock, that’s question one.

And then second question is just around your most promising oil liquids plays. Other than the TMS, what are you most excited about right now and when should we be looking for the next major update on plays. Thanks very much.

Jeff Wojahn

Thanks, Greg. It’s Jeff Wojahn here. I’ve been waiting for your question on the Haynesville and I’m excited to talk about the Haynesville program and what it means. Our primary decision for pursuing, reinvesting in Haynesville is because of the strong capital efficiency and profitability of the program.

Why is that so? And I think there is three factors that we all need to take into account. I mentioned previously the new state rules that drive efficiency in our programs. But a large component of our confidence in the program is also related to our previous history and activity and we recall that Encana embarked on a large land retention program that allowed us to drill wells or required us to drill wells on a per section basis. This allowed us to find the best of the best sweet spots in the play. And I feel that Encana is fortunate to have sweet spot of the Haynesville play and so that puts us in somewhat unique position.

Secondly, the new state rules that I spoke of before, previous to that ruling, Encana was the first in the industry to obtain a voluntary unit and where we drilled six wells that just before are highest in play that extended outwards to reaches of 7,500 feet. Over the last year, we’ve been able to look at those wells and carefully understand across and their performance and what we found was that they were highly efficient and is changed our belief in what kind of supply cost that we can drive in the best part of the play.

To answer your question what remodeling for supply cost for this up coming years program, we’re estimating that our supply cost will be in that $2.50 range. What that means from a profitability point of view is using a flat $3.50 NYMEX price deck that we are able to achieve rates of return of approximately 30% and using $4 price deck and one way as we initiated this play the majority of the volumes will be seen in 2014 as we ramp up. A $4 price deck with yield approximately 40% rate of return into project economics. And that type of return would be reflective of what the current NYMEX strength is for 2014. So and down – we are highly confidential in our capability to execute. We have an excellent team with a fine track record and I think we can be very profitable in the price environment we are in.

Your second question was related to what plays in our emerging portfolio then I am excited about. The reality is when I look across the six to seven plays, we’ve had good results across the portfolio. The questions that we are trying to answer in the first six months of this year is what plays truly can be fundable and competitive with Encana’s portfolio. So we are not just looking for commercial results, we are looking for results of Encana’s excellent pass of suite program.

What you are hearing now which I mentioned in my comments, our Denver-Julesburg program or DJ program drilling the horizontals in the Niobrara and the Piceance basin is excellent, and I am very excited about that program. And that program is leading our production growth in liquids in the United States.

I’m very excited also about TMS as I mentioned in my comments, but other players are being evaluated from the Eaglebine that I mentioned, the San Juan basin which I intend to give a full overview in the next quarterly results. In Michigan we are currently drilling and completing and bringing on four wells, where we will have a clear decision point for the future of that basin.

Greg Pardy – RBC Capital Markets

Thanks, Jeff. So just and the ramp up there is certainly economics, it’s not a function of being a feedstock for LNG at all?

Clayton H. Woitas

Well, I think the Haynesville play is ideally located to be an LNG feedstock play. Currently we have worked on a large scale development plan. We've discussed this and tested that concept with a number of perspective partners. We do have a large-scale plan with tens of Tcfe of variability that could be used to fund the long-term commitment in LNG, and I think it's excellent. It’s ideally situated to do that. That isn’t our primary motivation, I think the market is still embracing the thought of vertical integration with E&P companies, but I think our asset is ideally suited for that eventuality.

Greg Pardy – RBC Capital Markets

Okay, and sorry to believe with this 250 then is that inclusive of land and that's like a 9% after tax IRR?

Sherri Brillon

Yeah, the way we calculate our supply cost we include all forward costs associated with that non-accruing land, land is (inaudible) and retain through our HPP drilling but also includes capital SG&A.

Greg Pardy – RBC Capital Markets

Okay, thanks very much.

Clayton H. Woitas

Thanks, Greg.

Operator

Your next question comes from George Toriola from UBS. Your line is open.

George Toriola – UBS

Thanks. I’m having couple of questions here. The first is just on strategy. And assuming we look out a couple of years and we continue to see depressed natural gas prices, what's the plan, how do you address that is it by continuing to ship capital to liquids as you’ve suggested and what type of liquid growth can you see over the next three to four years and otherwise what would you do in that environment. Clayton?

Clayton H. Woitas

Thank you, George. It’s Clayton here. Long-term depressed natural gas prices, I think in our opening remarks, we don’t control commodity price and what we do to control is costs. And a major initiative that we have with Encana I think our cost structure is being good, but need a significant opportunity to get us even more efficient in all aspects of our business, big factor is how we invest our capital. So our goal is, it’s going to take time. This doesn’t happen next quarter.

When you look at all aspects of our business, the cost there drive to be the lowest costs developer and producer of natural gas. So that’s our vision, and we will have a longer look at natural gas prices when the pricing is subdued. Our counter to that are depends just driving down our costs and we have those magnificent asset base both in Canada and United States, where I believe we have the opportunity in many of the places to drive our cost a lot lower. So a good example, but Jeff’s group has done in the Haynesville.

On the liquids growth front, that will be – seen good results to-date. We have the point that Jeff could have mentioned at some of this place and the same thing applies in Canada, we’ve managed to capture very large resources in place. I would like to use analogy, some of them the TMS may be you can use in oil sands equivalent type analogy. So a lot of resource has been captured. Now the challenge to the teams is to drive down the costs of the wells and through the productivity. So we have the resource, now we just have to execute in our part. Some of the plays success maybe measured in May or June when we look at those whole programs both in the United States and Canada, some may take two years but importantly we do have significant resource capture. Does that answer your question, George?

George Toriola – UBS

I guess with those, but I’m also looking for some sort of quantification if you can of where the organic liquids growth could go? So if you take the midpoint this year, 55, in three years from now is it a double from here, is it 30% growth or what’s the magnitude of the organic liquids growth opportunity the company has over the next three years?

Clayton H. Woitas

Without putting a specific numbers George, we have captured significant raw resource and the magnitude of our growth is going to be totally dictated by our success and deploying capital costs effectively in the field and enhancing productivity. I hope the sky is the limit, but again I think we have to be cautious here and do this step-by-step.

George Toriola – UBS

Okay, understood. One more question from me, the outlook you have provided for the year in terms of production guidance. I’m assuming that includes Deep Panuke from the middle of the year, is that accurate?

Clayton H. Woitas

Mike McAllister, our Canadian President will answer that George.

George Toriola – UBS

Okay.

Michael G. McAllister

Hi, George, it’s Mike here. How you’re doing?

George Toriola – UBS

Very well, thanks.

Michael G. McAllister

Yeah, so it does. We have somewhere $155 million to $165 million a day in our growth projections assuming that we have – the new Buoy by midyear as for communication from SBM, the owner and operator platform.

George Toriola – UBS

And that $155 million to $165 million is average for the year?

Michael G. McAllister

Yes, that’s annualized average, of course.

George Toriola – UBS

Okay. Okay, that’s helpful. Thank you very much.

Clayton H. Woitas

Thank you, George.

Operator

Your next question comes from Matt Portillo from Tudor, Pickering, Holt. Your line is open.

Matthew Portillo – Tudor, Pickering, Holt & Co.

Good morning. Just a few questions from me; one quick question or follow-up on the Haynesville, I was curious if you could provide us with an updated well cost? And then as we look out in out of years in kind of a 4 to 450 gas environment, where could that rig count accelerate to?

Clayton H. Woitas

Jeff Wojahn is with us, the U.S. President will answer those questions.

Jeff Wojahn

Sure. On the well cost depending on debt, but are you – the kind of rig for repair area. Our cost for 7,500 foot horizontals is going to be ranging in that $13 million to $14 million range. I will give you a little bit of range, because it’s a little bit of a function of where we would used to be in debt. In regards to the program, we’ve executed and operated at much higher level. This is a relatively modest program. We are going to measure the performance of the team and we are also going to look at the fundamentals of the program and then we’ll go from there. So we haven’t really outlined a longer-term development plan at this time.

Matthew Portillo – Tudor, Pickering, Holt & Co.

Okay. And then just shifting gears quickly to the TMS, we’ve seen some I think encouraging initial results from an IP perspective. I’m just curious, it sounds like you are pretty bullish on the prospectivity, but the capital commitment here is fairly low. You are running one rig and so just trying to get a little more color on how you guys are thinking about the commerciality of the play at this point, what you need to see from a IP or EUR perspective and ultimately where you think you need to see well cost come down to before you can get more aggressive on acceleration?

Clayton H. Woitas

Sure. We are seeing – one of the things that we’ve accomplished in the last year is a fairly thorough appraisal of our 300,000 acre plus during the 50,000 acre TMS position. So as Clayton said, we have defined the resource prospectivity across our land base and we feel that we are ideally situated in a play and kind of the northern central component which is shallower and thicker and having the higher oil deposit. So as more information comes forward, we’re feeling highly comfortable around the resource potential that we’ve captured in this play.

The focus over the next 5.5 wells I’ll call it is really to look at how can we increase completion intensity and therefore drive EURs. In 2012, we spend a great deal of time looking at improving our drilling performance. I think we have a line of sites drilling wells in 30 days down from 60 days. We're not doing that on a consistent basis yet, but we've made great progress relative to avoiding highly fractured zone, the fracture zone is good, because it potentially could have enhanced processing creditability, it’s also bad if you lose circulation when we're drilling. But we've been able to avoid that I guess drilling hazard here recently, but ideally we are really targeting 750,000 barrel a day EUR type wells or higher with the new completion technology and long-term cost in that $12 million to $13 million range.

Matthew Portillo – Tudor, Pickering, Holt & Co.

And just to the last point, should we assume that with the results you’ve seen today on the smaller completions that the higher IPs are not yet performing to those the EURs you are looking for targeting long-term. I'm just curious could you provide us a little color on I guess the EURs you are seeing at the moment?

Clayton H. Woitas

Yeah, we have some wells that we believe are in the 650,000 barrels EUR namely the Anderson 1H and 2H wells. We believe that we have the opportunity and it comes from our experience in operational capability in the Haynesville to increase our connectivity and fracs, increase our surface simulated rock volumes and do even better. And so that’s the challenge that the teams have in front of them, can we do better than the Anderson wells? Can we improve our cost structures? And ultimately, can we improve our profitability in our capital efficiencies? So that’s our target and we are going to be striving for that over the next 5.5 wells. We will be in a position to look at that program in the June timeframe for the company.

Matthew Portillo – Tudor, Pickering, Holt & Co.

Great. Last question from me, just on the Mississippian, you mentioned in the press release you saw some disappointing results in Kansas and then potentially some encouraging results in Oklahoma. I was curious, just if you could clarify that all and provide some color on that and kind of what sort of drilling program you are looking at in the Miss in 2013?

Clayton H. Woitas

Well, right now we have seven wells in our Oklahoma program. We’ve tied in five or six of those wells, they’ve just come online. We have seen as I mentioned encouraging rates. It’s too early for us to make a judgment on that program, we would like to flow those wells for the next 90 days to see how we are doing. But the results are really what we are looking for, it’s just a matter of how do these wells perform, what type of performances. I can tell you though that our drilling performance and our cost performance exceeded our expectations out of the gate and so we are very happy about that right now.

In the Kansas program, we have had disappointing results too much water and none oil to be short on the answer. And so we are not at this point looking to add to our activity in 2012, 2013.

Matthew Portillo – Tudor, Pickering, Holt & Co.

Thank you very much.

Operator

Your next question comes from John Herrlin from Societe Generale. Your line is open.

John Herrlin – Societe Generale

Just, one high-level one, you said that you are going to be looking for your replacement over the next three to six months Clayton, does the Board plan any sort of strategic change for how we can operate is going to give the new CEO latitude or is it going to be somebody who is of like mind in terms of what’s going on currently?

Clayton H. Woitas

Thank you for the question John. Yeah one thing go to we are somewhat blustered Encana is a wonderful suite of resources assets this that extend in North America, well as Canada and United States. So that’s our base assets, we have one of the top if not the top technical teams in North America, in terms of valuation execution. So that some of the assets we have. And it’s the new CEO who comes in, that’s how we serve it to the box it’s the reverse sorry, in the neutral here.

I think when new person comes up that’s what we have to work with. But there to add to, subtract to it’s all the part of the strategy this person will roughly have had a chance to get some familiar with all the assets of the Company there will be something that this person will bring. So it is go through these things initially and over time I’m sure there will be adjustments in the strategy. Don’t want to prejudge that.

John Herrlin – Societe Generale

Okay that’s fine. Regarding the dividend, retail investors might be interested in the sanctity of the dividend any change or outlook there?

Clayton H. Woitas

As you’ve indicated you would have seen in our press release the dividend has been declared, and there has been no discussion at the board level to make any changes in the normal amount of the dividend.

John Herrlin – Societe Generale

Okay. The last one from me, we will see the proceeds from the Kitimat sale and the first quarter balance sheet?

Clayton H. Woitas

Sherri will answer that.

Sherri Brillon

Yeah, you will see the results in the first quarter on Kitimat.

John Herrlin – Societe Generale

Thank you.

Sherri Brillon

And you have divestitures or activity. Yeah, thanks.

Operator

Your next question comes from Mike John from First Energy. Your line is open.

Mike John – First Energy

Hi, Brillon, just I guess more of a modelling question, but wondering if you can give me some guidance on the split of your liquids production oil versus condensate versus NGLs, it looks like the cash flow guidance a little bit lower than what I would have thought given the price deck you are using? Thanks.

Sherri Brillon

Hi, it’s Sherri Brillon. When we look at our mix in our oil number it’s oil NGL condensate. And then when I look at my NGL mix, I got about 30% of the volumes are ethane, 25% propane, 15% butane, and the balance being condensate at 30%. I will say that the ethane piece the majority of it is going to be extra getting Canada where we have very favorable...

Mike John – First Energy

Great. Thank you.

Clayton H. Woitas

Thank you, Mike.

Operator

Your next question comes from Bryan Singer from Goldman Sachs. Your line is open.

Bryan Singer – Goldman Sachs

Thank you. Good morning. Going back to the Haynesville, you mentioned that $13 million to $14 million well cost range, can you just talk about where you expect the EUR and initial rate from some of these wells today?

Clayton H. Woitas

We’ll have Jeff answer to that. Thank you

Jeff Wojahn

Bryan, one of the things that with our new completion designs that we’ve done, as we had the opportunity to look at some of our shorter laterals and if you look at it from per thousand foot basis and we feel with the new modern design in the core areas of the Haynesville that we will be able to achieve 2.5 Bcf for 1,000 foot that completed intervals, which would equate to 7,500 foot well approximately 18 Bcf. I’m sorry, what was your second question?

Bryan Singer – Goldman Sachs

There was not a second question yet, but I’ll ask one which is a bigger picture. Is your willingness to accelerate in the Haynesville reflective of your confident that Haynesville rates of return will exceed, what you can get out of your liquid portfolio?

Jeff Wojahn

When I think about that, and I kind of echo with Clayton said. We have a tremendous resource. We’ve established a large position and now our opportunity is to carefully capitalize and sort out the level commerciality for this play base. That is in contrast with Haynesville program, where we have demonstrated track record of operational excellence and non-results from careful study in the past.

And so, I look at those plays in a little bit different way. But ultimately, as our oil program evolves and matures, the Haynesville program will have to compete and ultimately what our goal is to pick the most capital efficient and profitable projects on a risk adjustment basis. That’s what we’re doing.

Bryan Singer – Goldman Sachs

Great, thanks. And lastly, just looking at the combination of exploration or kind of commercialization opportunities that you are pursuing and then your base production, do you see any role for acquisitions potentially in some of the lower cost or more development areas to add more development focused liquids there or gas based on that?

Clayton H. Woitas

Excellent question, it’s Clayton here, I’ll answer that. Yes, there is room for that to be good at sport, you should also be a – I think one of the criteria is you are going to be a good explorer and developer. You have to know what you are buying. We suspect both sides of the border both United States and up here in Canada, there will be oil, liquid acquisition opportunities that have some with them also. So that will be a part of our valuation program.

Bryan Singer – Goldman Sachs

That’s certainly I think could be meaningful from kind of the capital equipment perspective, or do you see that as more small here and there opportunity?

Michael G. McAllister

Right now we will view these as smaller bolt-on type opportunities.

Bryan Singer – Goldman Sachs

Great. Thank you.

Operator

Your next question comes from Peter Ogden from Merrill Lynch. Your line is open.

Peter Ogden – Bank of America Merrill Lynch

Good morning. My questions, just revolves around capital allocation with respect to guidance. You’ve obviously brought your capital down to $3.2 billion 80% allocated to liquids, was there any discussion – the market is single handily focused on your liquids production, you brought that down 10,000 barrels a day. Was there any discussion in taking more money away from natural gas putting into liquids and back stopping, getting that 10,000 barrels day back and then ultimately adding $400 million to the budget and going after that 10,000 barrels a day and what’s the limit to doing that? Is it equipment, is it learning, is it the stage of each of your liquids project? Just may be give me a sense of what you are thinking about internally there and especially as you go into 2014 and looking at liquids growth there. Thanks.

Clayton H. Woitas

Excellent question, Peter. It’s Clayton, I will answer that again. Again, as we’ve mentioned and it’s worthwhile repeating again. We will be reviewing the success or hopefully the lack of success in all these oil and liquid natural gas plays we are in. And if we are comfortable, we see a lot of success, a lot of opportunity to ramp it up without affecting our returns, we will look at doing that starting early in the summer. And if we – when we see the opportunity, the liquid oil numbers may be adjusted upwards, but it’s one that we are taking the measured pace to how we capitalize these projects.

Bryan Singer – Goldman Sachs

So is that, would you say it is, so is it the stage of your projects then for the most part and you are just in – you are starting to ramp up on the learning curve. With such a large resource, I would have thought you could – I mean $400 million will be easy to allocate amongst different fields. But it’s just measured pace. Would you call your guidance for this year conservative?

Clayton H. Woitas

Again, I go back to initial point. In the United States and in Canada, the teams have successfully put together a very large resource in place. And I believe in all except Kansas, we’ve also demonstrated that there is oil commerciality, there is oil production coming out of each of these plays. Now the stage we are at over the next three to five months is finding the ones that are most commercial give us the highest rates of return. That’s what – either be more capital shift over that, or even additional capital allocated. So it just getting our confidence up in terms of what these plays can provide us. And our guidance, that’s our guidance today and we’ll review it once we’ve had a chance to see the status of all these oil plays.

Bryan Singer – Goldman Sachs

Perfect. Thanks a lot.

Operator

Your next question comes from the Mark Polak from Scotiabank. Your line is open.

Mark Polak – Scotiabank

Good morning, guys. Just a quick question for you on the Horn River, now that you’ve exited the – your stake in the Kitimat project for the small piece of your Horn River acreage, how does that play fit into your plans longer-term, and could you see selling them more of the Horn River or exiting the complete lease?

Michael G. McAllister

Hi, Mark, it’s Mike McAllister here. We’re still drilling out our pad through with the joint venture here with co-gas and seeing great results with respect to the EUR per well. Being a dry gas and then on the end of the pipeline, we’re really putting our capital and another plays and focusing on more liquids rich plays here for the time being. No current plans here in terms of marketing on Horn River assets, but everything I think for the right price would be for sale.

Mark Polak – Scotiabank

Thank you.

Operator

Your next question comes from Menno Hulshof from TD Securities. Your line is open

Menno Hulshof – TD Securities

Yeah, thanks, and good morning. I just have a quick one in relation to the 2013 net divestiture target slight pull back there. It that a reflection of a softening market for M&A, or is it – that just a function of fact that you will probably don’t need the money given the reduced budget?

Sherri Brillon

Hi, it’s Sherri Brillon. Now, we have put it in $502 billion and that really more in line with what we have normally looked at it at a regular year when we looked at – looking at opportunities in the marketplace.

We will still be pursuing and active program on the divestiture side and if we get the kind of value that we think we can realize that optimize from our projects that are on the market. You could see changes in that number. Right now we feel very confident with the $501 billion.

Menno Hulshof – TD Securities

And so just to clarify, are you still active on the U.S. joint venture front and if so what you’re thinking in terms of timing?

Sherri Brillon

I’ll let Jeff talk to that because he is closer to.

Jeff Wojahn

Thank you. We continue to explore the opportunity to add joint ventures and improve our capital efficiencies. I think – I think mentioned earlier about the opportunity for Haynesville as a perspective joint venture opportunity for an LNG provider who is interested in seeing virtually integrated.

I think that’s an exciting opportunity and we are looking at marketing our oil program. We are very excited about some of the initiatives that we have going one right now and we’d like to get some of the results of that program. And once we have those program, I think we’ll be discussing those results with respected joint venture partners. So looking more towards a midyear review of our joint venture programs on the oil side.

Menno Hulshof – TD Securities

Perfect, thanks a lot.

Operator

Your next question comes from Phil Plovanic from Canaccord Genuity. Your line is open.

Phil Plovanic – Canaccord Genuity

Yeah, thanks. Could you elaborate more on why say said you’re not introduced by the Mississippi and Playing Kansas?

Clayton H. Woitas

We’ll turn that over to Jeff.

Jeff Wojahn

Yeah, I mean we drilled the triple wells and we had a milestone that we were looking for relative to productivity and we were able to achieve it. So we discontinued our program and we been focusing on our Oklahoma program where we have had good early results.

Phil Plovanic – Canaccord Genuity

I say more because more natural gas waiting and expecting on that?

Clayton H. Woitas

No more water and less oil as I mentioned, we just didn't hit the operational targets that we were looking for and that’s something we do. When we find something that’s not working, we exit and reduced costs and moving to new direction.

Phil Plovanic – Canaccord Genuity

Okay, fair enough. Just last one people talk about Encana the possible to that Canada, do you think, that that would be possible to new invest Encana rules?

Clayton H. Woitas

I guess that any company is for sale at any given time – what to say is right now we have had no calls expressions of interest and we will continue to do execute on our wonderful asset base and whatever happens, happens.

Phil Plovanic – Canaccord Genuity

In terms of new investment guidelines for you are updated do you think that prohibits company like Encana being acquired?

Clayton H. Woitas

The answer would be no.

Phil Plovanic – Canaccord Genuity

Okay.

Operator

Your next question comes from Bob Brackett from Bernstein research. Your line is open.

Bob Brackett – Bernstein research

Quick one on the Haynesville, you mentioned 18 bcf wells for the EUR should I assume you need about $36 million a day IP if I take your old type curve?

Unidentified Company Representative

One of the other thing I didn't mention is that we are slow backing our production meaning that we curtailed wells to improve long-term performance and so the type curve shape is actually shallower and more modest. So the typical initial productivity rates 30 day at initial productivity rates are more $15 million to $20 million a day range.

Bob Brackett – Bernstein research

Okay, interesting. The other question is, if you guys can make a 40% rate of return at $4 gas and this industry is happy to make 10% rate of return what we do to believe that the industry will simply fled the market with more gas and prevent us from never getting to a $4 number.

Clayton H. Woitas

I think one of my comments that I made earlier is that Encana is a unique situation in Haynesville really truly understanding what the sweet spot of the sweet spot is, and our activities focused on the best natural gas resources and as we know not all the rockets made the same.

Bob Brackett – Bernstein research

Okay, thank you.

Operator

At this time, we have completed the question-and-answer session and we will turn the call back over to Mr. McRitchie.

Ryder McRitchie

Thank you. We recognized that a very busy reporting day for many of you and we want to keep our call to an hour. So I thank you for joining us today and our conference call is now complete.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!