EnCana Sets 2011 Capital Budget

By Eric Fox | February 15, 2011 AAA

EnCana (NYSE:ECA) will keep capital spending flat in 2011 over last year, and expects this level of spending to result in 5 to 7% production growth per share during the year. The company also saw double-digit growth in production and proved reserves in 2010 due to investments in unconventional resource basins in North America.

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2010 Review
EnCana reported total production of 3.3 billion cubic feet equivalent per day in 2010, with most of this production composed of natural gas. This represented 12% growth per share over last year. One of the biggest sources of production growth for the company came from its activities in the Haynesville Shale. EnCana increased production here from 71 million cubic feet equivalent per day at the end of 2009 to 303 million cubic feet equivalent per day at the end of 2010.

EnCana ended the year with 14.3 Tcfe of proved reserves, a 12% increase over last year. This growth was due to activity in the Haynesville Shale and Horn River Shale in Canada.

2011 Capital Budget
EnCana plans a 2011 capital budget between $4.6 billion and $4.8 billion. This level of spending is about flat with 2010, as the company is being conservative due to the weak natural gas prices. EnCana expects these capital expenditures to lead to 5 to 7% production growth per share in 2011.

Since this budget will exceed the company's estimated cash flow for 2011, EnCana plans to divest some of its properties during the year to fund the gap.

EnCana has already begun its divestiture program and recently announced the sale of a natural gas processing plant in Colorado to Western Gas Partners, LP (NYSE:WES) for $303 million. The company is also looking for a buyer for a natural gas processing plant under construction in British Columbia.

Joint Venture
EnCana also signed a joint venture agreement with PetroChina Company Limited to develop the company's Cutbank Ridge properties in British Columbia and Alberta. PetroChina Company will pay $5.4 billion CAD for a 50% share of these assets. EnCana has 635,000 net acres here, current production of 255 million cubic feet equivalent per day and one Tcf of proved reserves. The company also owns natural gas processing capacity and pipelines.

Chinese energy companies have been active in entering into joint ventures with independent exploration and production companies. Chesapeake Energy (NYSE:CHK) signed a joint venture deal with CNOOC Limited (NYSE:CEO) to help develop its acreage in the Niobrara Shale.

Hedging
EnCana is concerned about the price of natural gas going forward and has an active hedging program underway. The company has approximately 1.8 Bcf per day, or 50% of its 2011 production hedged at a price of $5.75 per Mcf; and another 1.3 Bcf per day hedged in 2012 at $6.07 per Mcf.

The Bottom Line
EnCana reported solid growth in proved reserves and production in 2010 as the company's investments in the onshore area in North America paid off. The company's capital spending in 2011 reflects a cautious view on natural gas prices and will lead to single-digit production growth this year. (To learn more, see our Oil & Gas Industry Primer.)

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