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EnCana Corp. (NYSE:ECA)

Q4 2008 Earnings Call

February 12, 2009 1:00 pm ET

Executives

Paul Gagne – Vice-President, Investor Relations

Randy Eresman – President and Chief Executive Officer

Brian Ferguson – Executive Vice-President & Chief Financial Officer

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

Michael M. Graham – Executive Vice-President and President, Canadian Foothills Division

Sherri Brillon, Executive Vice President of Strategic Planning and Portfolio Management

[Don Swiston]

John Brannon

Bill Oliver

Analysts

Brian Singer – Goldman Sachs

Christopher Theal – Tristone Capital Inc.

Kim Pacanovsky – Collins Stewart LLC

Mark Gilman – The Benchmark Company

[Gerald Davies – KTDS]

David Bentley – AllNovaScotia.com

Patrick Roche – Daily Oil Bulletin

[Vincent Poulio – La Press]

Operator

Welcome to the EnCana Corporation’s fourth quarter and year end 2008 results. (Operator Instructions) I would now like to turn the conference over to Mr. Paul Gagne, Vice President of Investor Relations. Please go ahead, Mr. Gagne.

Paul Gagne

Welcome everyone to our discussion of EnCana’s fourth quarter and year end 2008 results. 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 one of EnCana's annual information form dated February 22nd, 2008, the latter of which is available on SEDAR.

I'd like to draw your attention, in particular, to the material factors and assumptions in those advisories. In addition, I want to remind everyone that EnCana reports its financial results in U.S. dollars and operating results according to U.S. protocols, which means that production volumes and reserve amounts are reported on an after-royalties basis. Accordingly any reference to dollars, reserves or production information in this call will be in U.S. dollars and U.S. protocols unless otherwise noted.

Randy Eresman will start off with highlights of our operating results and then turn the call over to Sherri Brillon, Executive Vice President of Strategic Planning and Portfolio Management. Brian Ferguson, EnCana's CFO will then discuss EnCana's financial performance. Following some closing comments from Randy, our leadership team will then be available for questions.

I will now turn the call over to Randy Eresman, President and CEO.

Randy Eresman

This conference call will highlight our performance in 2008, a year of extremes for our industry and for the market. Our results show that EnCana performed very well through the year’s peaks and valleys. I think this speaks volumes about the strength of our business model and the ability of our teams to keep their focus and deliver strong operating and financial performance during both prosperous and challenging times.

We maintained our operating and financial discipline and delivered on the goals we set for ourselves. We essentially met or exceeded all of our guidance estimates and are very pleased with our overall results. In the Canadian Plains division, we were able to capitalize on opportunities to optimize performance from some of our most mature assets. In the Canadian Foothills and U.S.A divisions, our growth assets continue to perform well and our emerging shale plays provided encouraging results.

In our integrated oil division, we began producing for our most recent expansion at Christina Lake, initiated the startup and commissioning process for our current expansion projects at Foster Creek, and commence construction of our coker and refinery expansion projects at Wood River following receipt of regulatory approvals.

For the company, total natural gas production averaged 3.8 billion cubic feet per day in line with guidance and up 8% over the prior year. Growth continues to be driven by our key gas resource plays while production increased 14% year-over-year.

Key factors contributing to the increase were a solid growth from Bighorn, coal bed methane, Cutbank Ridge and Fort Worth, as well as our increased [inaudible] interest and strong performance at our Deep Bossier play. In 2008, production from these plays provided growth and offset about 800 million cubic feet per day of natural decline, which is about 21%.

On the oil side of our business, overall volumes were consistent year-over-year. The Canadian Plains oil assets performed generally as expected and experienced a minor production decrease. This was offset by 13% growth from Foster Creek and Christina Lake driven by improved client operations, reduced downtime and the startup of Phase 1B at Christina Lake.

Refinery analysis averaged 93% crude utilization for 2008, slightly lower than 2007. Operating cash flow from our downstream business fell short of expectations for 2008, and Brian will go through the details of that in a moment.

Operationally, order performed as expected through the year while Wood River was impacted by an extended turnaround power outages, crude supply interruptions during our hurricane season and weak gasoline margins. The coker and refinery expansion project at Wood River received regulatory approval in September and we are moving forward as planned with this project.

I would now like to turn the call over to Sherri Brillon, Executive Vice President of Strategic Planning and Portfolio Management.

Sherri Brillon

We are very pleased with our reserved growth in 2008, a year that began with strong prices and substantial activity, but ended in slumping commodity prices and a declining economy. Our teams’ efforts throughout 2008 resulted in strong reserve additions in a challenging environment. Excluding acquisitions and divestures, total reserve additions of 2.7 trillion cubic feet equivalent were achieved with associated capital investment of 6.8 billion.

Proved reserves increased about 5% to 19.7 trillion cubic feet of gas equivalent despite December 31 year-over-year price decreases up 16% in NYMEX and 54% in WTI. We replaced 150% of the company’s 2008 production and our reserve life index remains out about 12 years.

We believe the resulting finding and development cost of $2.50 per 1,000 cubic feet equivalent continues to be very competitive. EnCana’s three-year average finding and development cost is about $2 per 1,000 cubic feet equivalent, which we believe represents top cortile performance in our peer group and reflects the strength of our assets and our resource play model.

For our natural gas program specifically, finding and development costs were approximately $2.90 per 1,000 cubic feet equivalent, an increase of about 20% from 2007, again, a very competitive result. Excluding costs related to the purchase of non-developed land, EnCana’s natural gas focus F&D would be $2.45 per 1,000 cubic feet equivalent.

Our reserves continue to be 100% externally evaluated by independent qualified reserve evaluators, not just reviewed or audited, and are reported on a fully SEC compliant basis. Revisions to opening balances were positive overall in each of our operating divisions, with the exception of the U.S.A division where weak year end Rockies gas prices affected reserve bookings primarily at peon.

Despite low oil prices at year end, our Foster Creek and Christina Lake projects had no reserve write-downs reflecting the quality of the underlying resource and EnCana’s strong operating performance. Of note, proved reserves were added for the first time at Deep Panuke, an indication of our progress on the development of this offshore gas asset. First production at Panuke is expected in late 2010.

Overall capital spending, including acquisitions, finished the year in line with our guidance expectations. We were able to complete a number of planned divestures in the last quarter of 2008 as anticipated. For the year, net acquisitions totaled about $270 million. We continue to have asset packages in the market. However, with the current economic environment, we acknowledge that some of these transactions may not be completed. These potential sales are not critical to our 2009 capital program, and we will not sell asset at prices below our expectations.

Looking forward into 2009 and recognizing the continuing uncertainty in the economy, we are moving forward at a measured pace. Our key resource plays have performed as expected in the first month of the year and we are on track for our annual guidance, despite some freeze-offs in Canada in January and continued shut-in volumes in the Rockies.

As we move through the year, we will continue to review our current program and make adjustments where necessary. We have several initiatives underway across the company, which have the potential to reduce our capital and operating cost target while maintaining our production volumes. We hope to be in a position to provide details on this later in the year.

With respect to 2008 inflation, cost pressures eased in the fourth quarter as expected and both steal and fuels experienced price declines. Overall, inflation for the year was inline with our 0.00% to 0.05% expectation. For 2009, the industry appears to be in a wait and see mode, the length and depth of the industry’s slowdown in activity will be key in determining where inflation ends up for 2009.

Labor rate, which are significant component of overall costs, are not expected to move with the same timing or velocity as other input. In the first part of the year we have seen an increased willingness on the part of our suppliers to negotiate, but reductions not likely to be pronounced until the latter half of 2009. For the year as a whole, we expect overall inflation to be moderately negative.

I will now turn the call over to Brian Ferguson, who will discuss our overall financial performance.

Brian Ferguson

As Randy pointed out, EnCana continued to show discipline and strength in 2008. This is reflected in both our yearly results and our current financial position. EnCana's fundamental financial strength is driven by the predictable, low cost, repeatable nature of our resource play business models.

EnCana has a strong balance sheet and continues to employ a conservative capital structure. Debt to adjusted EBITDA finished the year at 0.7 times, and debt to cap at December 31 was 28%. I'd like to mention that we have modified our debt metric calculations, making them more stringent.

Going forward, we're using the current and long-term portions of debt, rather than debt net of working capital. We believe that this methodology provides a more conservative measure of liquidity, and is more comparable between periods by excluding the impact of unrealized mark-to-market accounting gains or losses on working capital, which were part of the previous net debt calculations.

If we had not made this change, our net debt to cap would have been reported at a very low 23%. Both debt to cap and debt to adjusted EBITDA are below the bottom end of our managed ranges. We are financially well positioned to pursue our operating plans this year.

We're less than 50% drawn on our revolving credit facilities. At December 31 EnCana had available, unused committed bank credit facilities of about $2.6 billion U.S. These credit facilities are provided by a diverse group of more than 25 banks. More than 80% of our outstanding debts made up of long-term, fixed rate notes with maturities between 2009 and 2038.

In the near-term, we have only one 2009 U.S. dollar maturity, which is $250 million this coming August. And looking into 2010, we've got one U.S. dollar maturity at $200 million that comes due in September of next year.

Two thousand eight cash flow was strong and in line with our guidance expectation driven by higher net backs, net of realized hedging losses, and increased production. EnCana achieved cash flow per share on a diluted basis of $12.48. That's up 13% compared to last year. Operating cash flow for the company was also in line with guidance.

There was a dramatic impact, however, as Randy noted in the financial results for integrated oil business. The volatility in oil prices and crack spreads really hit home here. Operating cash flow for our upstream business at Foster Creek and Christina Lake contributed about $420 million of operating cash flow over the course of the year, which is almost doubled 2007.

Our downstream operations posted an operating cash flow loss for the year of $241 million. This was driven by a large negative year-over-year swing of about $1.3 billion. The key components driving this swing were related to low crack spreads and a dramatic drop in oil prices, particularly in the fourth quarter.

Decreases in Chicago and mid-continent 3-2-1 crack spreads, which were down about 40% year-over-year, accounted for about $800 million of that swing. Our use of FIFO accounting, of valuing inventory as required by Canadian Generally Accepted Accounting Principles, accounted for another $350 million of the swing. And finally, product inventory write-downs that reflect year end pricing accounted for a further $95 million. Approximately $580 million of the $1.3 billion year-over-year change occurred in the fourth quarter.

For the company overall, our strong cash flow performance was accompanied by strong operating earnings of $5.86 per share on a fully diluted basis, an increase of 9% compared to last year. Our net earnings of $5.9 billion for the year were up about 53% over 2007. That's on a per share basis.

As a reminder, it is important to recognize a key factor contributing to this increase is the mark-to-market accounting of the unrealized portion of our hedge program, and the volatility in reported numbers that can result as a result of commodity price movements.

The mark-to-market accounting on our hedge program resulted in an unrealized after tax gain of $1.8 billion in 2008, compared to an unrealized after-tax loss of $811 million in 2007. That's a swing in net earning of about $2.6 billion year-over-year. This is why we prefer to focus on operating earnings and why we've removed the unrealized amounts from our debt to cap calculations.

This large gain is an indication of the strong hedging position that we have in place. We have approximately two billion cubic feet per day of expected 2009 gas production hedged from January through October of this year with fixed price instruments at an average of $9.30 per 1,000 cubic feet.

We also have put options in place on an additional 620 million cubic feet a day for the first ten months, setting a net floor of $8.65 on those volumes. Beyond 2009, we do have a small portion of our expected gas volumes hedged, and we will look to protect additional volumes when the opportunity presents itself.

Having hedges in place helps provide protection on the downside. This gives increased certainty for our cash flow, our capital program and our dividend. Our hedging arrangements are with a diversified group of approximately 25 different counterparties that all have high investment grade credit ratings. Regardless of the market volatility and recessionary pressures, our balance sheet is strong.

Now looking specifically at our costs for the year, combined operating and administrative costs were $1.25 per 1,000 cubic feet equivalent, which was in line with our guidance. Costs increased about 7% compared to last year. There was a number of items that account for this. The bigger parts are repairs and maintenance, work orders, salaries and benefits, and property taxes. Overall, strong financial results for EnCana.

In this environment, we are highly focused on the key objectives of maintaining financial strength, generating significant free cash flow, further optimizing our capital investments and continuing to pay a stable dividend to shareholders.

I'll now turn the call back to Randy.

Randy Eresman

We continue to demonstrate what we believe to be industry leading performance in the development of unconventional natural gas and in-situ well resource plays. Our portfolio's strong assets, supported by solid financials, is not a stroke of luck. We've been building our North American portfolio, fine tuning our approach to the resource developments and establishing strength and flexibility in our balance sheet for years. And that discipline is paying off now more than ever.

Overall, our 2008 results are very positive and indicative of the strength of our company. Like any year, 2008 had its challenges and its triumphs. By our strategy of carry low risk, low cost North American resource plays with a strong balance sheet and commodity price hedges has allowed us to be more resilient in this market downturn, and to maintain our position of strength.

We're taking a measured approach to our 2009 program and have allowed for ample flexibility. We're less than two months into the year and we've already been taking action, further reviewing project approval requests, identifying discretionary spending, looking for opportunities to further improve our efficiencies, and applying additional scrutiny to projects planned but not yet started.

It's not clear how long the current economic and market conditions will persist. And until we're comfortable with our financial expectations for 2010, we will not be making any bold moves. However, we are confident that we have prepared ourselves to emerge from this environment operationally strong and with the integrity of our balance sheet intact.

Thank you for joining us today, and our team is now ready to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Brian Singer – The City of New York from Goldman Sachs.

Brian Singer – Goldman Sachs

I wanted to just get an update on the various plays in East Texas/Louisiana, what you’re seeing in Deep Bossier and Haynesville and your expected trajectory of production there over the course of 2009?

Randy Eresman

Jeff Wojahn is here, President of our USA Division and I guess he’s asking you, Jeff, to take him through some of the major highlights of your plays in that area.

Jeff Wojahn

Starting off with East Texas in Deep Bossier, our program for 2009 is relatively flat, maybe a couple rigs less. I think we’re going to bring forward a program to of about 10 rigs, working on a program down from 12. We have not pursued exploration successes in East Texas. We are aware of a number of exploration projects on our land that we deferred until better economic times.

But the results we have seen through this year and a very strong fourth quarter is kind of indicative of the quality of the asset. We continue to work on that 9 to 9.5 BCF tight curve that we talked about last quarter in the conference call, and I think we’ll continue to see very strong results out of East Texas, as you’ve seen in the fourth quarter this year.

In regards to the Haynesville activity in Louisiana, in the fourth quarter we operated and completed three wells, the [Bundrich 35H, the Blackstone 12H and the [inaudible] 1H well.] These were wells using the current consensus and the play of more sand, longer horizontals, finer sand, more fracture stimulation intervals.

And although we haven’t released the particulars of these wells, I can tell you that the results from those wells are in line with some of the press releases that you’ve seen more recently from other operators in the play. And you may have also noticed that there has been some very strong results posted by industry in the Red River Parish area, which is the area that the majority of our lands occupy. So, overall for this year, we have about a five net rig program planned.

We have made some minor gathering commitments into local pipelines and will be back hauling some of our production into the Carthage area. We obviously need to look at midstream and downstream solutions as we gain comfort in our cost structures and tight curve information based on the new completion results that I just talked about. So, we’re taking a very measured approach, we’re working with our partners and I think as the year unfolds, we’ll have a strategy in place to continue to look at the play.

Randy Eresman

Jeff, I think he was also asking about the production growth in the areas, in those two areas.

Jeff Wojahn

I don’t have the guidance in front of me and in regards to production growth but I can get back to you on that.

Randy Eresman

I think in terms of Deep Bossier play will likely be producing on average this year in line with our exit and in the Haynesville play, not really forecasting a great deal of production over the course of the year. And we’re really looking more for the results and trying to understand them and looking at a longer term development.

Brian Singer – Goldman Sachs

Secondly, if gas prices at current levels continue, does that change your level of investment and your drilling program versus the guidance that you outlined, I guess, in December?

Jeff Wojahn

As you know, we’ve got a significant amount of our production hedged for the 2009 gas year and so what we’re really going to be paying attention to is how natural gas prices start appearing in 2010. Right now, they’re not very attractive so that would suggest that we should be considering reducing our program going into 2010, but there is a lot of year left to unfold.

Fortunately, the natural gas inventory numbers have been coming down quite nicely, the weather has been cooperating and rig counts have been falling at a fairly phenomenal rate. All of those things are supportive of some form of natural gas recovery through the year.

But the other side of that equation is what’s happened to demand, and we certainly know that demand has been reduced in a number of areas and we’re trying to get a handle on that. I think that’s what everybody is trying to understand, what the reaction will be to the current recession and how quickly it starts turning in terms of natural gas usage in the United States and Canada.

Operator

Your next question comes from Chris Theal – Tristone Capital in the City of Denver.

Chris Theal – Tristone Capital Inc.

My question relates to Deep Panuke with the reserved booking. I guess number one, what amount of capital did you spend at Panuke, where are you in the construction process and just an update on budget and timing?

Randy Eresman

Mike Graham is going to speak to that.

Mike Graham

Yes. Panuke is moving ahead. We do plan to have first gas production on for Q4 2010. To date, we spent in the order, not a lot of capital, I guess about $70 million and our projections are still on track. We think we’re going to come in at about $760 million. So, we are moving ahead with Panuke and everything is moving along nicely.

Chris Theal – Tristone Capital Inc.

Just one more question. The drilling in Canada, the CBM wells and shallow gas picked up, is that something that’s going to sustain itself through 2009 or was that early in the winter and now you’re going to respond to gas prices in the outlook here?

Mike Graham

In regards to CBM, we do a lot of our activities sort of in Q4 and Q1, if you will, because the farmers aren’t in the field at that point. But we do plan to actually drill a little bit less wells in CBM. We drilled in the order of about 700 in 2008 and we plan about 425 in 2009. I can still tell you that CBM the Horseshoe Canyon play is very robust, the economics are good, a lot of it are on sea land. Over 75% of it are on sea land so it’s quite easy to defer, if you will.

Chris Theal – Tristone Capital Inc.

And in the shallow gas side?

[Don Swiston]

On the shallow gas side, this is [Don Swiston]. Just like Mike, we’re very active in the first quarter but again we’re going to be down a good bit from last year. We’re only going to look at about 700 well planned for 2009 and were considerably above that last year, more like 1200 wells.

Operator

(Operator Instructions) Your next question comes from Kim Pacanovsky – Collins Stewart LLC from the City of New York.

Kim Pacanovsky – Collins Stewart LLC

I was wondering the three wells that you mentioned were completed in the third quarter in Haynesville. Were those all drilled to the lower Bossier or were there any completions in the upper Bossier?

Jeff Wojahn

The three wells that I referred to, two of those wells were Haynesville wells one of them was a mid-Bossier well. The mid-Bossier well was a Colbert well, which we’re currently flowing with three stages open and have another additional five stages that we haven’t flowed yet.

Kim Pacanovsky – Collins Stewart LLC

When you will be releasing results on that well?

Jeff Wojahn

We’re going to complete that full well and after that well is completed and we get some information about it, we’ll talk about it. But the mid-Bossier is an area that EnCana’s land base is that mid-Bossier is well developed on so it’s a critical well from our point of view in regards to understanding the development plan in that zone as well as the Haynesville.

So, it’s clearly going to be something that we talk about when we get our development results. But generally it’s not our practice at EnCana to release well by well results. We tend to prefer to give general updates on our plays as they proceed and as we have material new information.

Operator

Your next question comes from Mark Gilman – The Benchmark Company, from the City of New York.

Mark Gilman – The Benchmark Company

Had a couple of things, Jeff, I assume, hopefully correctly from your remarks, that you still really have not encountered in the Deep Bossier program the kind of big wells that you had earlier on, and also that your comment about exploratory success in some of your acreage refers to some of the recent Hilltop activity that frankly looks awfully encouraging.

Jeff Wojahn

Mark, yes, it's Jeff, the results are in line with the tight curves that we talked about in the guidance's we've talked about, early on in the play we drilled a number of top wells, wells that were listed as you know, some of the top wells, drilled in North America in the last five years. But as we developed the play we've understood the tight curves weather better and we've adjusted them.

We have an exploration discovery in Hilltop and we're going to be doing some work in that area. It's too early to really comment on what kind of tight curve that we're going to establish long-term there, but clearly we understand that there's exploration potential beyond what our current program is and you know the outfit is performing very well for us.

Mark Gilman – The Benchmark Company

You have had there recently had a pretty good well, haven't' you?

Jeff Wojahn

Yes, we have drilled a few strong wells, but again we're tying to show you what a realistic tight curve for the play is and a realistic capital efficiency and economics in our portfolio. Make no mistake about it, East Texas is a very strong area for us. It has the highest capital efficiencies and the highest returns in our U.S. portfolio, and we're building off that success.

Mark Gilman – The Benchmark Company

Jeff, what kind of net acreage number went along with the billion in Haynesville acquisitions in '08?

Jeff Wojahn

Let me get back to you on that one, I'll grab those numbers for you.

Mark Gilman – The Benchmark Company

Okay, I just had one more with respect to Foster Creek. It just seems to me as if the production contribution of 1C continues to lag, Randy, maybe if John Brannon is on, he could talk about it.

Jeff Wojahn

Yes, John is here and he can bring you up to speed on everything that is going on.

Mark Gilman – The Benchmark Company

That'll be great, thank you.

John Brannon

Yes, I think at Foster Creek the production capacity as we've expanded up to 1C is 60,000 barrels a day. We've averaged almost 57, almost 58,000 barrels a day through the first six weeks of this year. We think that that's performing to our expectations.

We did actually have some production as high as 64,000 barrels a day through that 60,000 barrel a day facility, so it may have been a little slow coming on and we've had a couple of operational issues with interfaces and those things, but in general, we're very happy with the overall performance at 1C.

Mark Gilman – The Benchmark Company

Thanks John.

Randy Eresman

Jeff, are you ready? Okay, we're still looking, we'll just talk about that a little bit later. Thanks Mark.

Operator

Your next question comes from Christopher Theal – Tristone Capital Inc., City of Denver.

Christopher Theal – Tristone Capital Inc.

Just one more question as it relates to cartage, basis has widened out more than double over the last let's say eight weeks, lots of wells coming in, can you just talk about your strategy with respect to both physical capacity and financial hedging, just to protect yourself as you move into a more aggressive development mode. It seems like there's in aggregate, lots of gas coming at the market, and then what’s the potential pipe constraint.

Randy Eresman

Hey Chris, it is fairly early for us to be looking at our longer term development plans for the area. We do recognize that a lot gases come on in a very short period of time and it’s causing some issues in the area. I think, Bill, do you want to speak to it a little bit more, but more in general what we're trying to understand in the play is what ultimately we'll require for capacity and what the major long-term solutions needs to be for in EnCana.

Bill Oliver

Thanks Randy. Chris, generally as we look into all these regions we look at the supply and demand balance and obviously in Texas, we expected with that activity we would see increased supply. One thing that obviously we didn't appreciate is the lack of demand that we're seeing in the Houston Ship Channel and that's because of the less requirements from the chemical industry.

But what we've done this year and next, is we have a combination of the Houston Ship Channel we're exposed to that, but also we have moved a large part of our production to NYNEX as a percentage. So we are not fully exposed to that break away at the moment.

We're confident, as we've seen in the past, from 2007 to 2009 there's been about 20 BCF a day of pipeline either interstate or intrastate, and there's another 5 BCF a day of expansions beyond 2009. There are people coming to us, third parties looking to backstop some of their proposals, so we are fairly confident that we're in the right region at the right time.

We might have some bottlenecks but we'll manage those through our hedging positions on the basis, but in the long-term we really think we are in the right place and we will get gas to market and won't be subject to any extreme basis risk.

Operator

Your next question comes from [Gerald Davies – KTDS] from the City of Shreveport.

[Gerald Davies – KTDS]

Yes, this is probably for Jeff, in layman's term how would you characterize the Haynesville shale in the future in the year 2009, how many rigs are you going to have and what's the potential there?

Jeff Wojahn

Yes, this is Jeff Wojahn, our current program plan for the Haynesville is that we will be operating five net rigs throughout the year, and we have a partner in shale and they will be operating rigs as well. So, we're really in that phase, we're a little bit behind some of the other operators in regards to announcing more aggressive plans and we're really in that phase right now where we're trying to reduce our costs and trying to develop some rigor around our tight curves.

So as far as the play as a total, our most recent information I've seen is that there's 40 to 50 rigs working somewhere in that neighborhood plus or minus and obviously a number of operators have indicated aggressive plans to retain their land and to grow their production.

[Gerald Davies – KTDS]

What does that mean for the future?

Jeff Wojahn

Well, I think the future is that the Haynesville is looking like a material new supply growth area for America. I think that's clear and there have been many analyst reports and industry talk about this being potentially a play that could rival the Barnett as a source of shale gas. That's clearly the future and I think time will tell exactly what the supply costs are and ultimately what the volumes that we can expect, but there's no doubt today that we've seen encouraging results and there's a lot of activity.

[Gerald Davies – KTDS]

We're hearing talk of a record breaking well coming in, can you speak to that, Jeff?

Jeff Wojahn

Sure, the three wells that we completed in the fourth quarter, I think it's fair to say that they're strong wells, that on a mid-Bossier well, it's only half completed but it's promising. And the other two wells, I think, are in line with some of the results that we've seen in the play. There is no record breaking well that I'm aware of that EnCana has been involved with, but we have had good results that have been equivalent to the results published by the industry.

[Gerald Davies – KTDS]

With the supply apparently increasing and the demand apparently dropping, how does that play into the development of the Haynesville shale?

Jeff Wojahn

Well, one of the, I think, encouraging things about the Haynesville shale is that it is located in ideal spot relative to long-term transportation and markets, and obviously it's in the backyard of one of the biggest suppliers in America, and I think long-term that's going to bode well for ultimately the economics and overall supply costs for the play.

I think there's still a tremendous amount of work required by the industry and by EnCana and others to identify the cost structures associated with the play. It is complex. It's high temperature, high breakdown pressures, and there's still a lot of technology developed in order to come into a capital structure that is cost effective and so, you know that's our primary focus right now. But there’s no doubt about it that Haynesville is a very large shale resource that’s got a promising future.

[Gerald Davies – KTDS]

How hard is it to get the gas out of the Haynesville shale?

Jeff Wojahn

It’s a complex shale play relative to the technology associated with the Barnett shale. It’s deeper, higher pressure, and higher temperature. Therefore, requires more sophisticated technology development.

Operator

(Operator Instructions) Your next question comes from David Bentley – AllNovaScotia.com, from the City of Halifax.

David Bentley – AllNovaScotia.com

Hi this is a question for Mike Graham. Mike, I’m wondering, in view of the economic situation looking to save money, is there anything else that you might be doing at Deep Panuke to keep the cost down as far as, I’m thinking for example, you decided not to drill the reduction well. Is there anything else that you might do before you bring that in to keep the cost down in any way?

Michael Graham

Yes, David, Mike Graham here. We are looking at our costs not only in the East Coast, but throughout Canada as well and just where we can save money. A lot of the costs are locked in sort of Panuke now. And like I say the costs have been tracking we’re pretty close to the original budget. We have had a little bit of stress, on some of the engineering and some of the modifications to our original plan.

They’re being offset by the stronger U.S. dollar or the weaker Canadian dollar. So I can assure you we are moving ahead, we do still plan on having it on in Q4, 2010 at this point, and we’re doing everything we can to look at any throughout the project.

David Bentley – AllNovaScotia.com

When you mentioned modifications, Mike, are you thinking modifications from the original plan or have there been further modifications since you announced the one we’re on now?

Michael Graham

Just from the original plan, and they haven’t really been major. So we are tracking just slightly over, I think our original budget was within the $700 million range and we’re up around $760 million today.

David Bentley – AllNovaScotia.com

Yes, good. Very, very quickly, can you tell us anything about the acquisition of the vessel that’s being told that you possibly might have done a couple of them or perhaps there’s just one now? Can you help us at all on that? When I say acquisition of the vessel, I should say getting the vessel built in Nova Scotia as part of the local benefits plan.

Michael Graham

Yes, we are out for tenure on the supply boat contract, and right now we are evaluating the bid and we should have that out by the end of the quarter. So that’s about all I can really say at this point David.

David Bentley – AllNovaScotia.com

Yes, okay. And the only other thing, Mike I appreciate your help, whether you can say anything on benefits that would replace the accommodation block. Can we expect more on that score or?

Michael Graham

David, on the offshore economic agreement you’ll see we do plan to satisfy all of our commitments on that. So we are working closely with regulators on that and we feel quite comfortable that we will satisfy all of those economic benefits.

Operator

Your next question comes from Patrick Roche – Daily Oil Bulletin from City of Calgary.

Patrick Roche – Daily Oil Bulletin

Question about bitumen prices, the price you give us each day in Canada, Western Canadian select price that we publish in the DOB every day and the days leading up to and January 5, that was at $9.53 a barrel and then on the next day, January 6 it jumped to $30.67 a barrel. Was that the result of some high priced hedges and bitumen expiring?

And then the second part of my question is I think ConocoPhillips reported $9.53 as an average bitumen price in the fourth quarter, and I just wonder if you could shed some light on what was happening there?

Randy Eresman

I’ve got a lot of heads shaking here with a little bit of uncertainty. But, Bill is there anything you can offer on that? This is really something I think we need to look up. It’s not something that was highlighted within our own company. Anything John?

John Brannon

Randy, the only thing that I can say is the year end pricing for reserves evaluations and those things. WTI was $44.60 and then from that we get down to a field price, and our spot and the year end was around $30 for Foster Creek and $25 for Christina Lake.

Randy Eresman

If there’s something else you wanted, we’ll maybe give Bill Oliver a call.

Operator

Your next question comes from [Vincent Poulio – La Press] City of Montreal.

[Vincent Poulio – La Press]

Hi, my question is for Mr. Eresman, I have actually two questions. The first subject is about the hedging, I understand that EnCana hedged two-thirds of its production until October around $9.00, which seems like a very good decision right now. I was just wondering if it’s something you really do every year or if it’s a decision that you took this year because you were expecting that it might be the best thing for the company to secure earnings.

Randy Eresman

Yes thank you very much. In fact, we do have a process in place to hedge a significant amount of our natural gas production each year, and this year we were very fortunate as it turned out with the significant market downturn in terms of commodity price that our hedges is going to protect us very well.

But the reason we put our hedges in place really is to give more certainty with respect to our cash flow so we can cover with confidence our capital program for the year. And we put the hedges on well in advance as we’re starting to think about the level of capital expenditures that we want to make each year. So as we look forward into 2010 for that gas year, we’re now looking for opportunities to do the same, to put hedges in place that will help us decide the extent of our capital program based on what our expectations will be then for natural gas prices.

[Vincent Poulio – La Press]

Did you hedge more this year then the year before? And also did you hedge more then some of your competitors?

Randy Eresman

I think we, in general, hedged a significantly more then our competitors and we were fortunate to put them on at the time that the price outcome was quite robust with respect to what it is today. As it turns out, we did end up having a slightly higher percentage of natural gas hedged for the year. Part of that was due to our original expectation where we would be producing more through the year. But as the year unfolded, we thought it would be more prudent to reduce our production for the year to a lower level, but we left our hedges intact.

[Vincent Poulio – La Press]

The second subject is about the fact that here today or yesterday EnCana loss is kind of Title I in the TSX in terms of market cap. I understand that for investors it’s not a big deal and you want basically to have the best result. But the kind of loss of that Title I that you’ve been carrying for weeks and even months, either mean something to the company or it’s a symbol, or I don’t know. I’d like your thoughts about that.

Randy Eresman

You’re exactly right in terms of we want to have the best company, but we certainly don’t need to be the biggest company in Canada. I don’t even know that it was pointed out to us that we were in that position. We sometimes get an update like that on a quarterly basis, but it’s not something we track every day.

[Vincent Poulio – La Press]

So it doesn’t mean anything, even though sometimes it’s a symbol, the biggest company in TSX.

Randy Eresman

All we’ve ever wanted to be is the best company on the TSX.

Operator

Mr. Eresman, there are no further questions at this time. Please continue.

Randy Eresman

Well, thank you everyone for joining us today to review EnCana’s fourth quarter and year end results. Our conference call is now complete.

Operator

Thank you everyone for joining us on today’s review of EnCana’s fourth quarter and year end 2008 results. Our conference is now complete please disconnect your lines.

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Source: EnCana Corp. Q4 2008 Earnings Call Transcript

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