BUSINESS

Encana slowing pace of natural gas production as low prices linger

04/25/2012 09:52 EDT | Updated 06/25/2012 05:12 EDT
CALGARY - Encana Corp. is slowing its natural gas production in response to lingering price weakness, the energy giant said Wednesday as it reported a profit for the first three months of 2012.

The Calgary-based company (TSX:ECA) said it's aiming at reductions totalling 600 million cubic feet per day gross before royalties compared to last year through reduced spending, production shut-ins and other measures.

The natural-gas focused company, grappling with an oversupply of natural gas, said "it is clear" that a continued reduction of drilling activity is required in order to restore the market to balance.

"As an almost pure-play natural gas producer, Encana has been most affected by the low price of the commodity caused by the continued excess of supply," chief executive officer Randy Eresman told shareholders at Encana's annual general meeting Wednesday.

Net earnings for the first quarter were US$12 million, or two cents per share, swinging from a loss of US$361 million, or 49 cents per share, during the same period a year earlier.

Revenues, net of royalties, were US$1.8 billion, compared to $1.7 billion a year earlier.

Encana said its commodity price hedging program contributed US$358 million in realized after-tax gains for the quarter.

Natural gas production during the quarter was 3.27 billion cubic feet per day — two per cent higher than a year ago and five per cent lower than the fourth quarter of 2011.

Since it spun off its oil and refinery assets into Cenovus Energy Inc. (TSX:CVE) in 2009, Encana has been focused exclusively on developing natural gas.

Natural gas prices have recently hit 10-year-lows below US$2 per 1,000 cubic feet.

"We expect this market is going to continue to be a challenge in 2012, despite a significant drop in natural gas rig counts," said Eresman.

When companies drill for more lucrative natural gas liquids or oil, dry natural gas often comes up out of the ground along with it, adding to the supply glut. As well, an unusually mild winter has resulted in record-high storage inventories.

The switch from fuels like coal to natural gas and the prospect of a scorching hot summer provide some reason for optimism, Eresman said.

"We're starting to see signs of a price improvement, and have become cautiously optimistic about a price recovery later this year or early into next."

Encana has been looking at partnership deals, drilling for more natural gas liquids, tapping export markets and asset sales in order to get by in the gloomy market.

Last week, it announced Toyota Tsusho Corp. is investing $602 million to acquire a share of its extensive coalbed methane reserves in southern Alberta in a deal that will see the Japanese company acquire a 32.5 per cent royalty interest in about 5,500 existing and future wells.

In February, Encana said it would sell a 40 per cent chunk of its undeveloped Cutbank Ridge lands in British Columbia to Mitsubishi Corp. of Japan for $2.9 billion.

Encana had been banking on a $5.4-billion cash infusion from a joint-venture deal with PetroChina centred around assets in northeastern B.C. and Alberta. But that deal fell through last June when the two companies couldn't see eye-to-eye on an operating agreement.

The company announced US$3.5 billion in asset sales in 2011.

It has sold midstream, or pipeline and processing, assets in Colorado and Alberta, as well as gas producing properties in Texas.

Encana is also a partner in a project to build a liquefied natural gas export terminal in the northern West Coast port of Kitimat, B.C.

U.S. firms Apache Corp. and EOG Resources are also involved.

At Kitimat, natural gas piped in from northeastern B.C. will be cooled into a liquid and loaded onto tankers for export to energy-hungry Asian markets. Natural gas fetches a drastically higher price overseas than it does in the oversupplied North American market. Shipments are targeted to begin in 2015.

Encana shares rose four per cent to $18.36 to close Wednesday on the Toronto Stock Exchange.