EnCana Corp. Q3 2008 Earnings Conference Call Transcript

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EnCana Corp. (NYSE:ECA) Q3 FY08 Earnings Call October 23, 2008 1:00 PM ET


Paul Gagne - Vice-President, IR

Randy Eresman - President and CEO and Designated President & CEO of GasCo

Brian Ferguson - Executive Vice-President & CFO and Designated President & CEO of Cenovus

Jeff Wojahn - Executive Vice-President and President, USA Region and Designated President of the USA Division of GasCo

Michael M. Graham - Executive Vice-President and President, Canadian Foothills Division and Designated President of the Canadian Division of GasCo

Gerry Protti - Executive Vice-President, Corporate Relations, and President, Offshore & International Division and Designated Executive Advisor to Cenovus


Christopher Theal - Tristone Capital Inc.

Mark Gilman - The Benchmark Company

Gordon G - RBC Capital

David Bentley - AllNovaScotia.com

Richard Wyman - Canaccord Adams

Andew Potter - UBS Securities

Patrick Roche - Daily Oil Bulletin


Good day, ladies & gentlemen and thank you for standing by. Welcome to EnCana Corporation's Third Quarter 2008 Financial and Operating Results 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].

Members of the investment community will have the opportunity to ask questions first. At the conclusion of that session, members of the media may then ask questions. Please be advised that this conference call may not be recorded or rebroadcast without the express consent of EnCana corporation.

I would now like to turn the conference over to Mr. Paul Gagne, Vice President of Investor Relations. Please go ahead, sir.

Paul Gagne - Vice-President, Investor Relations

Thank you, operator. And welcome everyone to a discussion of EnCana's third quarter 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 gas assets and then turn the call over to Brian Ferguson, EnCana's CFO and Cenovus' CEO designate to discuss EnCana's financial performance as well as highlights of our integrated oil and shallow gas assets.

Following some closing comments from Randy, our leadership team will be then available for questions. I will now turn the call over to Randy Eresman, President and CEO.

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

Thank you, Paul. And thank you everyone for joining us today. Let me begin today's discussion of our quarterly results by saying how proud I am of the performance of our teams, that kept your eye in the ball for some very challenging times and have delivered what I believe to be exceptional, operating and financial results.

I'd like to address the subject which is foremost on many people's minds. The impact of the global credit crisis on our company's performance and our ability to operate in the future. Since when we announced last week that we've chosen to delay the timing of our proposed split into two independent energy companies. Those are general administrative reasons for creating the two companies [ph] in Cenovus and establishing EnCana as a pure play natural gas company are still valid, while there is simply too much uncertainty in the global debt and equity markets to proceed at this time.

Now despite this delay, we continue to work on reorganizing our companies, so we're prepared to advance a trial... transaction, when we determine that the market conditions are appropriate.

Secondly, the events that have unfolded in the financial markets over the past months have created a great deal of uncertainty for the supply and demand picture in the near future for suppliers, both the cost of goods and services we use, and for the commodity prices that we receive. As a result, we believe it is prudent to be conservative in the short term with our capital program until we get a better understanding about how it'll all turn out.

We do however believe that the current market downturn provides us with an opportunity to showcase the underlying strength of our company's assets, our strategy, our operational performance, and our financial discipline. And we are extremely well positioned to weather the current market storm and in fact are thriving it. Our balance portfolio of resource plays, our low cost operating structure, our disciplined approach to the capital investment, and the strength of our balance sheet all reinforce why we believe EnCana continues to be a solid long term investment.

Now onto our third quarter results. We believe that we will continue to confirm the strength of our business. First, let's look at the natural gas side of our company. Third quarter natural gas production was up 8% over the same period of 2007, and year-to-date production increased 9% year-over-year. This growth continues to be driven by our key resource play production, which increased 16% quarter-over-quarter, and 17% on a year-to-date basis.

We've achieved this growth despite a couple of unforeseen external events in the quarter. Hurricane Ike caused us to shut in some natural gas production in our Mid-Continent business unit. We lost 5 to 10 million cubic feet per day for the quarter.

And additionally the Rockies expressed [ph] [indiscernible] that occurred in September, for an scheduled for an unscheduled hydro testing that adversely virtually impacted our U.S. gas volumes by about 20 million cubic feet per day in the quarter, which is about 5 million cubic feet on an annualized basis. Despite these events, we continue to be very well positioned in our overall gas production performance.

Our strongest area of production growth in the quarter was east Texas, achieving year-over-year growth of 135%. We averaged about 340 million cubic feet per day of production in the quarter, and currently producing about 400 million cubic feet per day.

During the quarter, we encountered some issues with our casing pipe [ph] on several wells, and as a result, we have six wells currently delayed from coming on to production. Expect the production of these wells come on in the fourth quarter and targeting year end exit rates of about 440 million cubic feet per day.

Although it's growing in the development of new closures, we continue to define our approaches to optimize recovery from this field. That currently continues to be a leading near term driver of EnCana's expected production growth and from an economic metric standpoint, has now surpassed drilling [ph] as a top asset within our gas portfolio.

In the Haynesville shale play, we acquired additional acreage in the quarter, bringing our position to about 400,000 net acres, and an additional 63,000 net acres of mineral rights. Together with our partner, we're ramping up our activity in place to seven rigs by year end.

It's important to recognize that we're in the very early stages of this play's life. We've just a handful of data points across the play at this time. So we need to continue our pilot work and experimentation with growing and completion technology to find the keys that unlock the full potential of this play. Haynesville also has its own unique challenges which expect the land tenure, basic [indiscernible] and midstream solutions, which all the units will have to address in developing this play in an optimum manner.

We remain very excited about the Haynesville Shale and the potential it has to rival or even surpass the quality and scope of the Barnett Shale play. In Canada, our Bighorn, Coalbed Methane and Cutback Ridge, key resource plays all achieved 20% or greater production growth compared to the same quarter of 2007.

We continue to add to our already strong position in the market and now have approximately 700,000 net acres of land across the play. The performance of our wells built to date continue to exceed our expectation and drive growth at Cutback Ridge. Current production from Mannville alone is about 170 million cubic feet per day.

In the Horn River basin, we finished testing remaining two wells of our four well 2008 program. First well's tested at water [ph] and the [indiscernible] zones, and averaged 7.7 million cubic feet per day during its first month on production. Second well tested the lower lower most shale in the Demon [ph] section. The thinner ED shale with only four hydraulic fractures, but still tested a very encouraging 2.5 million cubic feet per day.

For 2009, the Horn River team is currently preparing to drill approximately 40 gross wells for our partner Apache. Capital spending, including acquisitions is ahead of our expectations at the end of the third quarter, and we've adjusted our total capital guidance reflect this.

The increase in total capital is primarily related to additional land acquisitions in Haynesville and Montney plays. We had expected to complete a number of loss selling divestitures over the next two to three months. However with the current market environments, some of these transactions may not be competed prior to the year end.

Now I want to stress, we're not in the situation where we need to complete these asset sales to raise capital and we will not sell assets at prices below our expectations. Based on the current outlook, we've adjusted our guidance for the year, and expect net A&D activity to be approximately $400 million.

Up stream and downstream and capital expenditures are online, TS [ph] are below our actual plans. So our total capital expenditures for the year, including A&D are now expected to be approximately $7.4 billion. With respect to inflation, our longer term planning has helped to minimize our exposure to increases in the first half of this year.

In previous conference calls, we had indicated our expectation for in additional and pricing impact towards the end of 2008, and into 2009. However, given the level of uncertainty and the business environment that exists today, which includes recent announcements of reduced capital programs by several industry peers are now expecting industry inflationary pressures in Q4 and 2009 to ease.

So our current estimates of inflation remain in line with the original forecast for 2008, which was about 0 to 5% for the company overall. Looking into 2009, we're confident that our supply requirements were met, and we'll continue to monitor inflationary pressures.

However given the current pace of change in the business environment, our forecast of 2009 inflation levels is not practical for us to make at this time. I'll now turn the call to Brian Ferguson who'll discuss our overall financial performance, as well as the integrated oil highlights. After Brian's covered off in his areas, I'll give you all some perspective on how we find operations in the volatile and uncertain market environment that's recurring in the plays there.

Brian Ferguson - Executive Vice-President & Chief Financial Officer and Designated President & Chief Executive Officer of Cenovus

Thanks Randy. Good morning, everyone. I intend to start by addressing a topic that is on everybody's mind and that's EnCana's strong financial position and outlook, which Randy has already touched on. I'll then provide an update on the operating performance of all what will be the new innovative oil company, which we recently named Cenovus Energy, Inc. EnCana has financial strength and flexibility and no practical constrains on access to capital to pursue our operating plan. We're less than 50% drawn on our revolving credit facility.

At September 30, EnCana had available unused instant [ph] bank credit then provide [ph] in the amount of about $2.7 billion. These credit facilities are provided by a diverse group of more than 25 banks. Over 75% of our outstanding debt is made up of long term fixed rate notes with maturities between 2009 and 2038.

In 2009 we have only one maturity, which is in August for $250 million. Our balance sheet remains strong. Net debt to adjusted EBITDA finished the quarter at 0.6 times and net debt to cap at September 30 was 26%. Our net debt is currently about $8.4 billion.

At year end, we expect that net debt to cap and net debt to adjusted EBITDA will be essentially unchanged from third quarter's level. The concept of generating free cash flow is important to us. Using the mid-point of our guidance range, we expect to generate $3.2 billion of free cash flow in 2008.

Cash flow was very strong in the quarter, driven by higher netbacks after hedging and increased production. EnCana achieved cash flow per share on a diluted basis of $3.74. That's up 28% compared to the same quarter last and ahead of street consensus. We've narrowed the range of our guidance estimate for our full year to an expected cash flow per share of $13.30 to $13.85.

Our cash flow performance was accompanied by strong operating earnings of $1.92 per share on a diluted basis, an increase of 40% compared to the third quarter of last year, which was also well ahead of street consensus. The increases in both cash flow and operating earnings reflect the higher production volumes and strong operating performance, that Randy described, and increased netbacks after hedging which was partially offset by some what lower downstream results.

Operating earnings also increased as a result of the reversal of our non cash long term incentive which I will comment on in a moment. Our net earnings for the quarter of $3.55 billion were up about 280% on our per share basis. However it is important to recognize that the main factor contributing to this number is the same factor that negatively impacted net earnings in the first two quarters of this year, mainly mark-to-market accounting of our hedge program.

In the rising commodity price environment that we experienced during the first six months in the year, we reported unrealized mark-to-market losses against the hedging position we had in place for the upcoming two year period.

However with the significant decrease in commodity prices that occurred over the third quarter, the losses our hedging position essentially reversed, this is reflected in the unrealized after tax mark-to-market gains, are just over $2 billion that we reported in the quarter. This is an indication of the strong hedging position we have in place for future quarters, providing increase certainty for future cash flow, our capital program and dividend.

During the quarter we made some significant additions to our 2009 calendar year hedging position. We now have over 1.6 billion cubic feet per day of 2009 natural gas production hedged through fixed price instruments at an average of $9.03 per thousand cubic feet. In addition we have put options in place on an additional 516 million cubic feed per day, setting a net floor of $8 65 per thousand cubic feet on those volumes.

For the remainder of 2008, we have fixed price hedges in place to almost 2 volume cubic feet per day at $8.86 per thousand cubic feet. And put option on 411 million cubic feet per day with a net floor price of $8.65 per thousand cubic feet.

These production volumes are protected on the downside no matter how low prices drop. Our hedging arrangements are with a diversified group of approximately 25 different counterparties with high investment grade credit rating.

Overall, a very strong position to be in for the upcoming 12 months. At current, NYMEX natural gas prices of approximately $6.90 for the remainder of 2008 and $7.37 for the 2009 strip, we are in great shape providing additional evidence of the financial strength that EnCana steers [ph] to.

Now looking specifically at our cost in the quarter, combined operating and administrative costs were approximately $0.79 per thousand cubic feet equivalent in the quarter, and about a $1.33 for the nine month year-to-date. For the quarter, this represents about a 22% decrease compared to the third quarter of last year. The large decrease is primarily due to the drop in our stock price which caused a reversal of the long term incentive cost that extended in the first two quarters of the year.

The combined costs were reduced by about $0.49 per thousand cubic feet in the quarter due to a reversal of a long term incentive cost, I mentioned a minute ago. This is directly related to our share price which at September 30 closed at $67.96 on the TSX, which was down from $93.36 at June 30th.

On a full year basis, we expect to average out at very close to our current full year guidance estimate of $1.40 for thousand cubic feet equivalent. Overall, these are very strong financial results for EnCana.

Now I would like to look specifically at what will be become of Cenovus Energy, our new integrated oil company. From an operating performance standpoint on a year-to-date basis we're running just ahead of budget on gas production and just a snick behind on oil and liquid productions.

On a BOE basis we are essentially right on track with guidance and budget. The Canadian Plain Division generates a tremendous amount of free cash flow for Cenovus Year-to-date the division was... has generated operating cash flow in excess of $2.8 billion compared to capital spending of above $590 million.

Our Canadian plain shallow gas volumes averaged about 690 million cubic feet per day in the quarter and were in line with our forecast for the year. This is highly reliable production that underscores Cenovus' versus financial strength.

And Weyburn, our Weyburn and Pelican Pelican Lake oil volumes are tracking in line with or slightly ahead of our guidance estimates for the year. At our in situ oil operations year-to-date oil production of about 28,500 barrels per day net to EnCana is slightly behind expectation, primarily due to some unplanned outages that were caused by bottom hole pump failures and external power outages that we are experiencing in both Foster Creek and Christina Lake.

Now to our gross assets in the integrated oil division. The expansion projects at Foster Creek and Christina Lake are proceeding on time and essentially on budget. Steaming of Phase 1B and 1E at Foster creek is underway and we are near completion of these phases. Together the yield expansions are expected to double existing production capacity in 2009 to a 120,000 barrels per day on a 100% basis.

Foster Creek gross volumes are expected to exit this year at about 60000 barrels day and we have a target exit rate for 2009 of about 90,000 barrels per day. At Christina Lake, production from our phase 1B expansion began in the quarter and we expect to see continued increases in production through the remainder of 2008. We are working with our partner to approve the next expansion phase which is expected to bring facility to capacity to nearly 100,000 barrel per day by 1012. Christina Lake gross volumes are ramping up and we expect exit 2008 in a range of 14,000 barrels per day.

Now let me turn to the downstream. In Chicago 3-2-1crack spread averaged $12.86 per barrel in the first nine months of 2008, at 37% lower in the same period 2007. Downstream operating cash flow was down by $440 million in the quarter compared to the same period last year. This is due to several factors. Due to crack spread, power outages and unscheduled agreements [ph], food supply disruptions as a result of the hurricanes and higher purchase product cost as a result of processing higher priced crude during the quarter.

One thing that I want to point out is that pursuant to Canadian generally accepted accounting principle, EnCana uses the first-in first-out method to value inventory which is different than U.S. Companies. At the end of the third quarter crude prices used to value downstream inventories were lower when compared to the end of the second quarter. As a result higher cost inventory reported in the second quarter was processed and sold during the third quarter contributing to lower operating cash flow.

The effect on operating cash flow during the quarter of this inventory valuation was a decrease of $95 million compared to an increase in the same period of 2007 of $72 million. For the full year 2008, we expect operating cash flow from the downstream to be in the range of $200 million to $300 million dollars for the year.

At the Wood River refinery we're proceeding with the construction of the coal and refinery expansion, the CORE project, which received regulatory approval in September. The project will expand heavy oil operating capacity from a current of about 110,000 barrels per day up to 240,000 barrels per day as well as the increase production of clean transportation fuels for the U.S., Mid-West markets.

For comparative purposes, standalone upgrader built in Alberta with a coker of this size which is 65,000 barrels per day will be capable of processing about a 130,000 barrels per day of bitumen. The CORE project captures the capital and operating efficiencies of building on a well established and well located refinery.

It's a key down stream integration component that enables our integrated oil business to grow at a highly competitive capital cost on a per flowing barrel basis. It is important to note that the CORE project is expected to significantly improve the realized margin at Wood River.

Built on a total $3.6 billion capital cost on a 100% basis, the capital efficiency would be approximately $28000 per flowing barrel of bitumen. Combined with our current upstream production expansions, total capital efficiency for an integrated project will be approximately 50,000 barrels on a flowing barrel basis of bitumen.

After completion of CORE, the Wood River and Borger Refineries combined will have total heavy oil processing capacity of 275,000 barrels per day. This will place us among the leading heavy oil refiners in the United States. Overall very strong performance for Cenovus assets and I'll turn the call back to Randy now.

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

Thank you, Brian. Overall, our third quarter results are very positive and continue to demonstrate the strength of our company. The past several years have been the strongest period of operational and financial performance in our company's history. The production growth remains strong. We continue to demonstrate industrial leading cost performance.

Our net debts are robust, supported by great hedging positions. So as I stated earlier we are very well positioned to ride out the current market uncertainty. The challenges facing the industry as result of collapse of the financial market have escalated very quickly. Our strategy is positioned us very well to withstand the impact, to adapt and to react.

As I stated in my opening comments, the fundamental rationale for the proposed split remains unchanged. The economic environment however has changed dramatically and it's too difficult to assess at this time when the debt and equity markets may stabilize and present us with a great right opportunity to proceed with the transaction.

Meanwhile we continue to demonstrate what we believe to the industry leading performance in the development of unconventional natural gas, [indiscernible] to well resourced players. We believe the strength, sustainability and profitability of our approach to these businesses will ultimately be better recognized by both industry and investors when they are able to operate a separate and focused entities.

We are working on a 2009 budget plans and expect to have more details for you towards mid-December. We'll be taking a measured approach with an increased focus on capital preservation that's appropriate given the current market conditions. Thank you for joining us today and our team is now ready to take your questions.

Question And Answer


[Operator Instructions]. We will take our first question from Chris Theal, with Tristone Capital.

Christopher Theal - Tristone Capital Inc.

I have only two questions, first on infill, looks like you are keeping your activity actually going up modestly through the year end. Other operators are talk about more faulting and that maybe more geologically complex, can you comment on that. And than how many rigs do you expect to run up at the horn over these winter. Thanks

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

Thanks Chris, I guess one thing I would say is in both of the Haynesville and Horn River players like new initial plays are being pursued right now in the industry there are lot of them very early learning's that are taking place, there's very few data points in the overall plays.

And so there is a lot of experimentation that's going to take place before we fully understand in our hard approach to development. And this is not unique, this is basically the way we approach our entire unconventional business overall.

For the specifics on the Haynesville and Horn River players carried over the Jefferson, Jonah and Coalbed Methane [ph].

Jeff Wojahn - Executive Vice-President and President, USA Region and Designated President of the USA Division of GasCo

Morning Chris. Jeff Wojahn. First I want to say that we're very excited about the resource potential and the acreage position that we have been able to assemble in Haynesville play. This is the tremendous resource with ten to TCS approaches that we have captured.

We're very excited and encouraged by where we're today on this play. As far as activity for the remainder of the year, we plan to exit the year at around six rigs, I think we will have five horizontal well reserves in the fourth quarter.

We're actively working on optimizing sand and water and pump inner wells and frac inner wells and all those things as well as trajectories of wells. I think in our conference call notes we've mentioned that we're going to drill a mid-borger, Haynesville play which is a very exciting opportunity for us in the shared inner-borger that we have not tested yet to date.

So with that information I think we're going to long ways to improving our learning and understanding the play but right now we're very excited where we're.

Michael M. Graham - Executive Vice-President and President, Canadian Foothills Division and Designated President of the Canadian Division of GasCo

Yes Chris, Mike Graham here. Just on the Horn River, we did drill seven wells this past winter and we done some very promising results, Randy commented on our last well, our biggest well to date and in the order about 8 million a day over the first month average and hopefully we can repeat those going forward.

We got a big land position probably about 230,000 acres all in one big chunk if you will. The rigs... we're looking at drilling about 40 gross wells, with our partner Apache in 2009.

Its currently what our plans are with, they are changing a little bit, but that's what we are thinking and really we'll we only need a couple rigs to do that. So we are actually mobilizing and we're moving a rig up the into the Horn River as we speak.

Christopher Theal - Tristone Capital Inc.



Our next question will come from Mark Gilman with The Benchmark Company.

Mark Gilman - The Benchmark Company

Guys, good morning, good afternoon. Couple of questions on the Haynesville, Jeff or Randy, any thoughts yet albeit early in terms of recovery rate? What kind of royalties on the incremental acreage you acquired. Also Randy you spoke of challenges associated with land tenure [ph] and I was wondering if you could elaborate on that a little bit?

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

Okay, there are some basic differences between the Haynesville and Horn River shale plays. In Haynesville a lot of land has been acquired on relatively short tenure as opposed the tenure that exists in North East British Columbia.

And so a lot of the activity going to be undertaken by Encana in the next couple of years as well all of the industry participants will be on trying to determine where the best acre positions are in the play and how to retain as much of that land as possible.

So this is high amount of activity that has to be undertaken and will not necessary contribute much to the bottom-line over the next couple of years. Whereas on the Horn River play I think Mike's program is really to start going into developing the gas factories that we often talked about there is in Canada where we can go into and started optimizing the overall developments around the land moving rigs around just to try to retain the land position.

And we'll have Jeff Wohahn add to that.

Jeff Wojahn - Executive Vice-President and President, USA Region and Designated President of the USA Division of GasCo

Sure, good morning Mark. In regards to Haynesville off budget questions I was getting them down between your asking them, but realty rates origin to play were in the 15-20% range more recently more other transactions have been conducted in the 25% realty range.

Overall we are I would say our land would be in the 20% range. And they also point out that the announcement of our Indigo minerals transaction earlier this year 89,000 mineral acres. We own fifteen so we don't pay royalties.

That's something that I learned in selling [indiscernible] is a good thing. And not only is it a good thing from a royalty rate point of view, but also from operational point of view. Because we own these minerals in those lands, we don't have any expiries. And so majority of the focus of our acquisitions of program this year will to acquire lands that will be their feed mineral, title lands with no royalties and no expiries or held by production land.

So that is one way that we're going to manage our land tenure challenges looking forward.

Unidentified Analyst

Thanks. Probably rate issue?

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

It's too early to understand recovery rates but that's something we're actively working on right now.


And for our next question we'll go to Gordon G. with RBC Capital.

Gordon G - RBC Capital

Good morning guys. Could you give us some color on your operating costs in Q3, they dropped quite dramatically on a quarter or quarter basis. Is it partly a function of the currency change. And I guess the second question is I noticed that you didn't have any current taxes in the U.S for Q3 in it and is that just a timing thing again ?

Unidentified Company Representative

Thanks, Gordon, I think that we'll simply answer on the Q3 operating cost since it's got to do with a mark-to-market changes on our long term examples. But sure to look to share price to the exchange and Brian is going to elaborate on that.

Brian Ferguson - Executive Vice-President & Chief Financial Officer and Designated President & Chief Executive Officer of Cenovus

Hi, Gordon, of you look at the Q3 by itself, there was essentially a $0.24, 12000 cubic feet equivalent reduction in our operating cost as the result of the drop in the share price during the quarter. Let's be specific in fact on the premium there. The FX had a relatively minor in the quarter... the big drop in the Canadian dollars in this quarter, the fourth quarter.


[Operators instruction]. Our next question from David Bentley with AllNovaScotia.com

David Bentley - AllNovaScotia.com

Hello, this one would be for Gerry probably if he is there. I was just wondering if we could have a little bit of an update on what's happening on the local benefits front on the Deep Panuke project. s you are aware of course the accommodation block which was expected to be built here, went off shore and I understand there are discussions with the provincial government to replace that and I'm just wondering where they are and what sort of projects you might be looking at and when we might be hearing the result of those discussions?

Gerry Protti - Executive Vice-President, Corporate Relations, and President, Offshore & International Division and Designated Executive Advisor to Cenovus

Hi David, Gerry here. Yes we are in discussions with the province and as you know and for others on the line you can kind have the commitment to Nova Scotia to spend at least 1.35 million hours in the development phase of the project.

And we certainly are going to live up to that commitment and I'll just note that one of the recent developments was an announcement last week by the Premiere and Laurentian Energy for a contract to built go two rigs, neighbor's rigs in Nova Scotia which will contribute, I believe something in the order of about 150,000 hours of employment.

So that would form a portion of it and taking all together we don't anticipate any difficulty in meeting that commitment underway. See you, David.


Our next question comes from Richard Wyman with Canaccord Adams.

Richard Wyman - Canaccord Adams

Good morning everyone, just have a couple of questions here. First of all can you offer a bit more color on the economics reduced to an MCF equivalent for the basis differentials... the hedging you've done between US Rockies and reference prices at Henry Hub.

Secondly on the Haynesville can you comment on any bottlenecks or constraints from off taking processing and infrastructure point of view that might impact the pace of development there. And a similar kind of question for Horn River with some evidence of the local infrastructure is going to be tapped out in predictable future. What alternatives you are looking at for moving what could be sizable volume of gas into North America or international markets and with that CO2 [ph] management of that gas?

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

Alright, Richard that's a lot of questions. The first one with regard to base of hedging positions that we have in place. I think it would be something better if we just talked to you on a one on basis to give you a... just give a lot of detail there. And regarding the transportation and situation in processing in U.S. and plain operations I will turn over to Jeff and Mike.

Jeff Wojahn - Executive Vice-President and President, USA Region and Designated President of the USA Division of GasCo

Good morning Richard I will talk about the Haynesville. I will take about the first. First of all I mean when you look across North America and you think about an area where you would like to find large resource lake the Haynesville play is much the best spot. I mean you can find something right at Henry Hub but you are close. So overall there is commencement of capacity, locally within Haynesville area current production is finalized being backed out to the Cartage [ph] hub area where these several hundred million cubic feet a day of current capacity and mostly operators are moving in that direction. Meets the long term, most of the Haynesville gas is thought bout to be moving towards Perigo [ph] which is about a 150 miles away hub that has multiple DCS takeway capacity.

So, I anticipate there will industry solutions in mid stream and downstream solution that industry will be working together on in the upcoming months.

Michael M. Graham - Executive Vice-President and President, Canadian Foothills Division and Designated President of the Canadian Division of GasCo

Yes, hi Richard, Mike, here again. We're have right today where there is about 400 million a day of capacity on the Texas system at Ford Nelson [ph]. As you know Richard that the Texas system [ph] is well set up to handle CO2 and what not, it has done a lot of that in the past. So, over the next couple of years we are in really good shape there with the 400 million a day of capacity.

Looking longer term in the Horn River, TransCanada has expressed some interest coming right into Northeast PC, if they can go under ND jurisdiction so and they are having an open season and we are looking to participate.

So we do have to get gap eventually back into the western mainline of TransCanada, but not for a year or two outcome anyway.

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

Other than that we really don't have any significant strengths on transportation in the company. And we are very well positioned with respect to our basic hedges.


And our next question from Andrew Potter with UBS Securities.

Andew Potter - UBS Securities

Hi guys, just a question on Horn River. As you move out to a bigger program next year and you think 40 wells, where would you expect to see cost come down to, I mean is that big enough scale to get a sense of kind of what commercial scale cost will be?

Unidentified Company Representative

Yes, that Andrew and that a great questions. We have this year, really improved in gas kind of across the big chunk of our land in the Horn River and next year we going to really work on the cost. If you look at the money which is similar debt and we draw similar on the horizontals, we think we can get a horizontal well probably down in that above that $6 million range.

So it yet to be seen honestly our cost have run over, they are higher than but like Randy said when we put a gas factory together what we plan to do next year and maybe drill as many as 20 wells of a single pads. We do believe that our cost like in all of our resource play will come down dramatically. So, at the end of the day we think our ease lies on these grounds at least on the last well it's probably in the 7 BCF range and hopefully our cost can get down in that 6 or $7 million range on program basis which would be a very attractive finding in around that play.

And don't forget as well up in the Horn River, we are working with the BC Crown here and they're looking at the net royalty of about 2% initially up front. So it makes our economics very attractive with that.


Our next question will come from [indiscernible] with UBS Global.

Unidentified Analyst

Thank you very much, a couple of questions. One if you could just talk about your share repurchase program and the rationale for suspending it temporarily?

Brian Ferguson - Executive Vice-President & Chief Financial Officer and Designated President & Chief Executive Officer of Cenovus

Okay, when we announce our split in May this year, we wanted to ensure that balance sheet at the time which was approximately year end was in the best shape possible. And so we were targeting a year end debt level of about $10 billion and we thought that was appropriate when we expected two companies. So we have got it to spend since that time. As we start going forward-looking at 2009 our share repurchase program we'll be consider it amongst all other uses for capital. That decision would be made in December of this year.

Unidentified Analyst

Okay thanks. Another question just regarding acquisitions in this environment and whether you are seeing opportunities and also whether an acquisition might be better undertaken as a large corporate entity and is that part of the driver of staying as one unit?

Brian Ferguson - Executive Vice-President & Chief Financial Officer and Designated President & Chief Executive Officer of Cenovus

Yes this, you know these a huge amount of market volatility that we have today. You know certainly could present the potential for acquisitions opportunities but at this early, early stage I think it's more prudent for companies to start trying to understand all of the implications before asking too quickly.

Unidentified Analyst

Okay thanks and if I could just ask one final question. I know that you are coming up with your budget in December. But do you have any thoughts at this point whether the reduction or an increase or stable capital program is a more likely scenario for you?

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

We have as Brian listed a very, very good hedging program in place is going to have a significant model protection of our cash flow for the next year. But the unhedged amount is variable and I guess our overall anticipation is that cash flows will be somewhat reduced going into 2009.

Given the way we have been managing to a maximum of 90% of our cash flow on our capital program. That in self will causes this to choke back a bid of the amount that we spent on a core capital. Rest of our details we nearly have to do the analysis and that's what we're going to focus on that over the course of the next two months trying to understand the implications of inflation or potentially deflation environment which may be caused by a reduction in overall activity levels.

What's going to happen on a world scale with respect to commodities and this may be a great opportunity to increase the growing program. It's just really so early to be fixing a plan or we're just at a point where we're reacting to so many changes. So given in the next couple of months I think its going to be a great opportunity for us to reflect on what the right approach is should be in this environment.


At this time we would like to invite our listeners from the media to ask question and [Operator Instructions]. And I'll pause for just a moment. Our first question comes from Pat Roche with Daily Oil Bulletin.

Patrick Roche - Daily Oil Bulletin

Yes hi. Just had one question, your total cash flow guidance is reduced to $10 billion to $10.4 billion range, what was that reduced from, what was it originally?

It had been increased at the second quarter of this year while we were starting to higher natural gas prices and the increase at that time moved up to between $10 million and $11 million. So really the range has also been narrowed to reflect only one last quarter, one quarter left of the year.


[Operator Instructions]. We have no further questions at this time.

Randy Eresman - President and Chief Executive Officer and Designated President & Chief Executive Officer of GasCo

Great, thanks very much everyone for joining us today. And this conference call is now concluded.


Once again that does conclude our conference call for today. We thank you for your participation, have a great day. .

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