Bloomberg News

Encana Plans to Reduce Natural-Gas Output, Spending in 2012

February 19, 2012

(Updates share price in last paragraph.)

Feb. 17 (Bloomberg) -- Encana Corp., Canada’s biggest natural-gas producer, will scale back investment and cut output to reduce North American supplies by as much as 600 million cubic feet a day in a bid to boost prices for the heating and power-plant fuel.

The company will immediately halt 250 million cubic feet a day from wells, Chief Executive Officer Randy Eresman said in a statement today. Spending for 2012 will drop about 37 percent to $2.9 billion, reducing output by another 250 million cubic feet a day from last year. The remaining cut is in the form of gas used as royalties, the Calgary-based company said.

Encana’s reductions come on the heels of similar moves by North American competitors. Chesapeake Energy Corp. said on Jan. 23 it would idle drilling rigs and reduce spending in gas fields by 70 percent. EQT Corp. announced three days earlier that it will suspend drilling in its Huron Field in Kentucky.

“Natural-gas prices in North American look set to remain weak through 2012 and beyond,” Terry Marshall and a group of Moody’s Investors Service analysts wrote in a report today. Producers will cut gas spending by at least 40 percent this year and the number of wells drilled by at least half, they wrote.

Gas futures posted their first weekly gain since January, rising 4.6 percent to settle at $2.685 per million British thermal units on the New York Mercantile Exchange. Average gas prices in New York fell 13 percent to $3.476 per million British thermal units in the fourth quarter from a year earlier. Prices reached a high of $13.577 in 2008.

Prices ‘Below Costs’

“It is abundantly clear that a continued reduction of drilling activity will be required to restore market balance,” Encana said in the statement. “For the industry as a whole, near-term natural-gas prices are at levels below what it costs to add most new production.”

In a separate statement, Encana said Tokyo-based Mitsubishi Corp. agreed to pay C$1.45 billion ($1.46 billion) for a 40 percent interest in its Cutbank Ridge gas assets in northeastern British Columbia. Mitsubishi will pay another C$1.45 billion over five years for development costs. Encana said it will cut spending elsewhere to reduce the deal’s impact on gas supplies.

Joint-venture agreements to develop shale-gas resources and continuing gas production from “wet” fields, drilled to get access to propane and ethane, will mean a “slight increase” in supply this year, Moody’s wrote. Encana will “almost certainly have the liquidity necessary to withstand this lean period” of gas prices, according to the note.

Encana reported fourth-quarter net loss narrowed to $246 million, or 33 cents a share, from $469 million, or 64 cents, a year earlier. Sales rose 72 percent to $2.46 billion.

The shares, which have seven “buy,” three “sell” and 17 “hold” ratings from analysts, fell 0.9 percent to C$19.97 at the close in Toronto.

--Editors: Tina Davis, Charles Siler

To contact the reporter on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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