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Encana (NYSE:ECA) will spend around 75% of its 2014 capex in its core production areas in North America. One of the company's core natural gas producing areas is Montney, which is one of the largest natural gas resources in the world. This shale formation extends from Northeastern British Columbia to the Peace River Arch of northwest Alberta. Encana is focused on Montney for its tight natural gas resources. This formation can produce more than 2 billion cubic feet per day, or bcfpd, of natural gas. Encana's current production from Cutbank Ridge averages 600 million cubic feet per day, or mcfd. Currently it has a 3,700 gross well inventory in Montney. Gross wells refer to those wells that company has working interest in. Encana has a total net acreage of 575,000 in Montney.

Encana's resource play hub model in Montney helped it improve its operating efficiencies and reduced the operating and capital cost. The resource play hub model is a technique that is meant for reducing the production cost of natural gas. This tailor made model is created primarily when multiple horizontal wells are drilled at a single pad location. The continuous process of drilling in a single pad mobilizes the workforce, as they need to travel shorter distance.

Also, the rigs used in this model are known as fit for purpose rigs that are designed to drill multiple wells in a single pad and continue the production. These rigs help the company start production from the wells, while the drilling process continues. The company can move these high performance rigs easily without disassembling from one place to another. Previously, the company saved around $250,000 to $500,000 as disassembling cost by using fit for purpose rigs, and I believe this design will continue to help the company increase its production efficiency in the coming years, allowing substantial cost savings.

On the other hand, the cost of a shale gas well in Montney is comparatively lower than the other formations of Encana in North America. A single shale gas well in Montney costs around $8 million to $10 million approximately, whereas in Duverney it costs around $12 million to $18 million. With the lower well cost in the Montney formation, I think the company will be able to focus more on technological advancements under the resource play hub design, and it will increase the production of natural gas in the longer term.

To reduce its capital spending and improve the cash flow, Encana entered an agreement with Mitsubishi Corp. (OTCPK:MSBHY). Through this agreement, Mitsubishi took the development opportunity in the Cutbank Ridge with Encana and ensured energy supplies in Japan and Eastern Asia. This agreement is planned to develop Encana's natural gas production in Montney, Cutbank Ridge. Encana will invest around $900 million in its Montney formation next year. The total capital investment of Encana and Mitsubishi in Montney will reach around $1.7 billion to $1.8 billion next year. Around 80 to 85 net wells will be drilled in this formation next year, and the joint venture will operate around six to eight rigs in Montney.

Reducing cost: Better Cash Flow

Historically Encana has shown a strong improvement in its free cash flow structure. Continuous reduction in capital expenditure during all quarters helped the company witness major changes in cash flow this year.

Quarters (2013)

First Quarter

Second Quarter

Third Quarter

Operating Cash Flow (in $ millions)

338

554

935

Capital Expenditure(in $ million)

715

639

641

Free cash flow (In $ millions)

-377

-85

294

Encana decided to cut the workforce by 20% in the coming year. Last year Encana had 4169 employees, so the reduction in workforce will be result in the company laying off around 833 employees. Moreover, with focus on selected oil and gas plays, it has planned to reduce its capital expenditure more in the coming quarters. Encana decided to spend $2.5 billion as capital investment in 2014, which was lower than the guidance the company provided previously in the third quarter of around $2.7 billion to $2.9 billion.

With lesser capital expenditure, the company will continue achieving a strong cash flow position in the future.

Conclusion

Encana, with its advanced production technique, is expected to increase its natural gas production from the Montney formation in the coming year. Substantial cost reduction in operations and reducing capital expenditure will help the company strengthen its cash flow structure. Although the company is currently struggling with the declined gas price, I am optimistic about its future gas production from the major plays in North America.

Source: Encana: Focus On Montney