Late Wednesday, Encana (ECA) provided an update to its spending plans for 2012-13, increasing its spending on oil and liquids rich plays. The company held an investor day yesterday to discuss the outlook.
Encana plans to invest an additional $600 MM during the remainder of 2012 to capitalize on positive drilling results on a number of its North American oil and liquids-rich plays. The company's original 2012 plan to drill between 40 and 45 wells has been expanded to between 115 and 120 wells in 10 plays primarily focused principally on oil. The company plans to drill approximately 350 oil and liquids rich wells in 2013 with gross capital expenditures of $4.0-5.0 billion. Encana's investment in oil projects next year will represent 27% of total capital spending, compared with only 1% in 2011. Liquids rich spending should represent about 50% of 2013 capex, up from 34% in 2011.
Oil and liquids production is expected to average 30 MB/d in 2012, growing to 60-70 MB/d in 2013. Next year, Canadian production is expected to average approximately 1.6 Bcf/d and 33 MB/d (of which 24% is expected to be oil and the remainder NGLs), while the U.S. is expected to average approximately 1.4 Bcf/d and 33 MB/d (of which 58% is expected to be oil and the remainder NGLs). Encana will be focused on the following oil and liquids-rich plays:
Duvernay - Encana holds approximately 400,000 net acres in this play and estimates a total of 8.7 billion BOE (approximately 30 Tcf and 4 billion barrels) of petroleum initially in place on company lands with 1,000-1,600 well locations identified. Three horizontal well tests continue to indicate encouraging results with 50-60° API gravity condensate yields ranging 120-200 B/MMcf. Five wells have been drilled to date and the most recent well which has been tied into permanent facilities (16-5) flowed at approximately 1,200 B/d of condensate and 3.5 MMcf/d during its first two days onstream. Encana plans to drill a total of 10 wells on this play in 2012. Well costs are estimated at $15 MM during development drilling and the company is targeting to reduce well costs down to $11 MM.
Tuscaloosa Marine Shale - Encana has established a 355,000 net acre position on this play and has identified 9.4 billion BOE of petroleum initially in place. The two most recent wells produced initial 30-day production rates of 930 and 1,080 B/d of 40° API gravity oil per day.
These wells are performing "well above pre-drill expectations." The company has identified ~1,250 locations and 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 on its approximately 115,000 net acre position in the Eaglebine light oil play. This is a very thick, extensive resource play and the company estimates 8.6 billion BOE of petroleum in place. Four wells have been drilled to date, with horizontal lengths ranging 4,500- 6,200 feet and initial 30-day production rates ranging 165-230 B/d. ECA has one rig running and plans to drill six wells over the balance of the year.
Utica/Collingwood - Encana plans to drill an additional five horizontal wells this year on its approximately 430,000 net acre land position in this play, focusing on the liquids rich window. The company sees 24 Tcfe of petroleum in place on its lands and has identified over 1,700 well locations.
Encana's guidance for 2012 as follows:
Gross capital spending has been increased to $3.5 billion, from $2.9 billion previously, while dispositions are expected to total $3.0 billion;
Gas production is expected to average 3.0 Bcf/d with liquids production of 30 MB/d, compared with 2.9 Bcf/d and 28 MB/d previously;
Using $95.00/B WTI and $3.25/MMBtu NYMEX gas, cash flow is forecast at $3.5 billion or $4.75 per share.
For 2013, the company is guiding to:
Gross capital spending of $4.0-5.0 billion with dispositions of $1.0-1.5 billion; Production of 2.9-3.0 Bcf/d and 60-70 MB/d; Cash flow is forecast at $2.5-3.5 billion.
At a trading price of $19.83, Encana was valued at an EV/DACF multiple of approximately 6.3x our 2013 estimates, versus the peer group average (excluding ECA) of 5.5x. Another key factor in analyzing whether to buy, sell or hold ECA is its recent drilling results, which are detailed in our review of Western Canadian drilling results.
We calculate ECA's net asset value (NAV) at $11.30 per share using strip commodity prices and applying a 10% discount rate on an after-tax basis. The company's current P/NAV multiple is 1.7x, which compares with the peer group average (excluding ECA) of 1.3x.
ECA continues to be overvalued in relation to its peers and therefore we maintain our hold rating.