Encana gungho for Texas shale oil

Encana says Texas shale oil assets performing better than when they were purchased

The drastic drop in crude prices has not soured Encana Corp. on a pair of multibillion-dollar purchases it made last year to gain a foothold in Texas shale oil, CEO Doug Suttles toldshareholders last week.

At Encana’s annual general meeting, investors questioned the wisdom of spending more than US$10 billion on deals in the Permian and Eagle Ford regions just before crude prices shed half their value in a six-month span.

One contributor to the crude price rout has been the glut of oil flowing from U.S. shale fields.

Suttles said the outlook for crude prices had little to do with the acquisitions, saying it was a mug’s game to predict where they’ll land long-term.

“The reality is we bought these assets because of their underlying potential,” he said.

Last May, the Calgary-based company (TSX:ECA) made its foray into Texas shale oil, purchasing the Eagle Ford in southern Texas with a US$3.1-billion deal with Freeport McMoRan.

It followed up in September with its US$7.1-billion acquisition of Athlon Energy Inc., with properties in the Permian formation in West Texas.

Suttles said the Permian has three billion barrels in resource potential and 5,000 wells that can be drilled, with production not expected to peak until well into the next decade. It’s a similar story for the Eagle Ford, he said.

Together, the two Texas shale oil areas are expected to make up half of Encana’s cash flow in 2015.

“We’re very pleased with the purchase,” said Suttles. “They continue to actually perform even better than when we bought them.”

Encana’s liquids volumes have increased 78 per cent year-over-year. Approximately 74 per cent of liquids production in the first quarter was generated from the Montney, Duvernay, Eagle Ford and Permian. Encana’s first quarter investment in these assets is expected to deliver a significant increase of liquids production in the second half of 2015.

Suttles ushered Encana through a major strategic shift since becoming CEO nearly two years ago. Since around 2009, when it spun off its oil properties to form Cenovus Energy, Encana was known as a natural gas-centred player. But under Suttles’ leadership, Encana has once again become more oily.

Encana posted a US$1.7-billion net loss in the first quarter and a 98 per cent drop in operating earnings as it felt the impact of lower oil and gas prices.

The loss, reported in U.S. currency, included $1.2 billion in asset impairments.

Excluding those and other items, Encana had $9 million of operating earnings, which was better than analyst estimates but down from $515 million a year earlier.

The operating earnings amounted to one cent per Encana share, down from 70 cents. Analysts had an estimated an operating loss of nine cents per share, according to Thomson Reuters.

Encana says its daily production in the first quarter dropped to the equivalent of 430,100 barrels a day, down from 536,100 a year earlier, as a result of its sale of lower-margin assets.