Upcoming Encana Analyst Day - Implications For Chesapeake, Goodrich, Gastar, Sonde, And Others

by: Josh Young

Encana (NYSE:ECA) will be having an Investor Day on Thursday, June 21st. The investor day will obviously be interesting for Encana shareholders and potential shareholders. It will also have implications for investors in other companies. Encana has been actively exploring for oily and liquids rich shale plays in areas where other companies also have leasehold. Those other companies may have more leverage to those particular plays. If Encana announces highly economic wells in these plays, it will be good to know who else will benefit; particularly when some nearby companies are already potentially attractive investments.

The play that Encana likely has the most exposure to, but that hasn't gotten a lot of buzz yet, is an EagleBine shale play in East Texas. As an aside, I think East Texas is currently under-rated in the investor community. Lots of interesting things are happening there, from Halcon (NYSE:HK) and Crimson (NASDAQ:CXPO) drilling barn-burner Woodbine wells, to little known Gale Force (OTCQX:GFPMF) growing 300% per year from cheap, highly productive vertical wells and re-completions.

Encana has hundreds of thousands of acres leased in East Texas, where they developed the Bossier sands, a world-class tight gas play. There were shallower oily zones that they bypassed while drilling for the gas. One of these zones is known as the EagleBine. Encana drilled one horizontal well to the EagleBine last year, which had peak production of as much as 750 boepd, but settled down to produce less than 200 barrels per day stabilized. EOG recently drilled a well in the area to the same formation, and the field level chatter is that it IP'd at over 1,000 barrels of oil per day.

If Encana's wells produce at that rate, that would obviously be beneficial to Encana's valuation. But it could affect Gastar's (NYSEMKT:GST) even more. Gastar has almost 20,000 net acres immediately adjacent to Encana and very close to the recent EOG well. And GST is near its 52 week and 5 year low, seems very undervalued from a number of metrics, and has seen recent insider buying. Encana drilling success in the EagleBine could help GST recover from a recent, precipitous decline.

The plays with the most buzz for Encana are the Tuscaloosa Marine shale and the Duvernay shale. I am less familiar with the Tuscaloosa, but there have been few well results to date. If Encana's wells are highly productive, the private-market value of acreage in that shale play should increase substantially. Goodrich Petroleum (NYSEMKT:GDP) has a large land position in the play, so if Encana's wells there are successful, GDP stock could rise substantially.

In the Duvernay, there are numerous Canadian companies with exposure to the play. A company in the play that I am very familiar with is Sonde Resources (NYSEMKT:SOQ), which has over 40,000 net acres in the play, and is trading for near the value of its cash balance with no debt. If Encana has great Duvernay results and the liquids rich and oily windows of the play start to work, SOQ stock could outperform on the news.

In the Mississippian, Encana has just started drilling wells, so they may not have much data to release. But one company I recently invested in in the area has had superb results - AusTex Oil (OTCPK:ATXDY). Austex participated in a well that Range Resources (NYSE:RRC) drilled, that seems to have stabilized at over 1000 barrels of oil per day, which makes it one of the largest wells in the field. Obviously this is good for Range and even better for the much smaller AusTex, and could be good for Encana if their acreage is in that area of the play.

One other area worth mentioning is the Collingswood shale (now being referred to as the Collingswood Utica), which is rumored to have had several positive liquids rich results. This would be particularly impactful for Chesapeake (NYSE:CHK), which is looking to monetize 450,000 acres there.

In summary, Encana's investor day will be interesting to Encana investors, but could be more impactful for other companies such as Gastar, Sonde, Goodrich, AusTex and Chesapeake.

Disclosure: I am long GST, SOQ, OTCQX:GFPMF, OTC:ATXDF, and may buy or sell any of the stocks mentioned at any time without further notice.