I've followed the story at Chesapeake Energy (CHK) pretty closely. How can you not? There is just so much going on. A Controversial, mega rich CEO. An overleveraged balance sheet discounting enormous asset value. Controversy over fracking. And now, legendary shareholders taking control of the Board of Directors
Encana (ECA) is like Chesapeake without the drama. Both companies have had enormous success in the shale gas game. In fact, both companies have actually had too much success as they have been big parts of ramping up North American natural gas production to a level that overwhelmed demand and killed the commodity price.
The drop in natural gas prices has left both Chesapeake and Encana with balance sheets built for the cash flows associated with much higher natural gas prices but faced with current depressed prices. Interestingly the response of both companies to their reduced operating cash flow is to actually ramp up capital spending. Who knew?
Not just any capital spending mind you. Capital spending that is directed at oil and liquids production which will create considerably more cash inflow than drilling for natural gas would.
Encana just announced that it would increase capital spending by $600 million from prior guidance in order to accelerate development of emerging oil and liquids plays and diversify the company production sources.
Encana is estimating $3 billion in cash flow in 2012 and $4 to $4.5 billion in spending on development. To fund the spending above cash flow Encana (like Chesapeake) is planning to enter into strategic partnerships (joint ventures) as well as divest certain assets.
With natural gas in the $2/mcf to $3/mcf the joint ventures and asset divestitures are likely going to involve pieces of the very oil and liquids plays that Encana is eager to drill.
Those emerging oil and liquids plays that Encana has assembled as detailed by the company include:
Duvernay - Encana now holds approximately 400,000 net acres in this play. Three additional well tests continue to indicate encouraging results with 50 to 60 degree API gravity field condensate yields ranging from 120 to 200 barrels per million cubic feet (bbls/MMcf). Our most recent well which has been tied into permanent facilities (16-5) flowed at approximately 1,200 barrels per day of condensate and 3.5 million cubic feet per day of 1,295 BTU per standard cubic feet rich natural gas during its first two days on stream. Encana plans to drill a total of 10 wells in the play in 2012.
Tuscaloosa Marine Shale - Encana has established an industry leading land position in the Tuscaloosa Marine Shale totaling approximately 355,000 net acres. The two most recent wells (Anderson 17H-1 and 18H-1) have horizontal lateral lengths of about 7,400 feet and 8,800 feet and produced initial 30-day production rates of 930 and 1,080 barrels of 40 degree API gravity oil per day. Encana plans to drill a total of 12 wells in the play in 2012.
Eaglebine - Encana plans to drill a total of 12 wells in 2012 within its approximately 115,000 net acre position in the Eaglebine light oil play. The company has drilled four wells to date, with horizontal lengths ranging from 4,500 feet to 6,200 feet and initial 30-day production rates ranging from 165 to 230 barrels of oil per day.
Mississippian Lime - Encana's land position in this play now totals about 360,000 net acres. The company is planning to drill 15 wells in this light oil play during 2012.
Utica/Collingwood - Encana plans to drill an additional 5 horizontal wells on its approximately 430,000 net acre land position in this play, focusing on the liquids rich window.
San Juan - Encana plans to drill a total of 12 wells across its approximately 174,000 net acre position in the San Juan targeting the oil window of the Gallup formation. The initial well (Lybrook H36) was drilled with a lateral length of about 4,100 feet and yielded a 30-day initial production rate of about 440 barrels of oil per day.
DJ Niobrara - Encana plans to execute a two rig program in the Wattenberg field of the DJ basin. The company forecasts drilling 12 oil focused wells in this area in 2012 with a focus on optimizing lateral spacing, orientation and well length.
Clearwater Liquids - Encana has identified a significant inventory of prospective oil opportunities on about 4.6 million net acres of land in southern Alberta. Targeting numerous zones, the company will focus on the development of 300 high-graded locations and plans to drill 30 wells in 2012.
Up to this point the large international and national oil companies have had a healthy appetite for buying slices and slivers of resource plays that have been accumulated by the likes of Encana and Sandridge. That appetite has been drying up on the natural gas side of the resource play equation due to the low commodity price.
Liquids weighted resource plays like the Mississippian Lime where companies like PetroRiverUSA and Range Resources (RRC) operate have in the past year still seen a lot of joint venture and divestiture activity led by the Sandridge Energy (SD). Perhaps Encana will join Sandridge and bring in a partner to help ease the burden of drilling up this emerging play.
Encana's share price took a tumble after the announced increase in spending. I don't expect to see much of an improvement in the share price until the market sees some more successful asset sales, and even then the stock may go nowhere until we see a little more reasonable price for natural gas.