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Squeezing Out Oil, Gas, And Profits


Gwyn Morgan was a 31-year-old petroleum engineer for the Alberta Energy Co. when he began supervising the drilling of the Suffield natural-gas field in a rural corner of the western Canadian province, an area used for training exercises by Canada's army. In oil-patch parlance, it was an "unconventional" field -- its gas deposits were tough to gather, trapped in layers of rock, sand, silt, and coal. But the Suffield property is unusual for another reason: Almost 30 years later it is still pumping out steady streams of gas. "Our wells last for decades," says Morgan, who rose from field officer to chief executive of EnCana Corp. (ECA), formed in the merger of Alberta Energy with PanCanadian Energy in 2002.

Under Morgan's direction, EnCana has bet big on exploiting hard-to-extract natural gas and hard-to-process heavy crude, bitumen, and oil sand. With skyrocketing energy prices, such plays are looking more appealing and economical these days. That's especially true in North America, where most of the easily accessible energy has been siphoned out, leaving pockets of stubborn reserves that usually cost more to get at. "To achieve any kind of growth you have to be focused on unconventional [plays]," says Andrew Potter, an analyst at CIBC World Markets.

Even in the energy biz, where sky-high oil and gas prices mean gushing profits for all, EnCana stands out. It has snapped up thousands of acres of resource-rich land in the past five years, allowing the Calgary-based company last year to pass Exxon Mobil Corp. (XOM) and BP PLC (BP) to become the largest natural-gas producer in North America. EnCana has played its hand well, designing projects that pay off at a low price point -- $25 per barrel of oil, well below today's $50-plus spot market price. Its revenues have nearly doubled since the 2002 merger, soaring from $5.9 billion that year to $11.8 billion in 2004. Net income jumped more than fourfold, to $3.5 billion. And EnCana's profit margin of 18.7% handily beats those of most energy companies. That record has been rewarding for investors -- and has some speculating that EnCana may make an attractive takeover target.

While the supermajors, by and large, have chased light, sweet crude and easily-captured gas out at sea and in geopolitical hotspots, EnCana has thrived on fields picked over and forgotten that are much closer to home. In a project in the rolling green plains north of Fort Worth, Tex., EnCana is squeezing gas out of a formation that has been giving up energy for a half-century.

"FINDING A WAY"

"We're not discovering new resources, but finding a way to commercially exploit resources that were considered uneconomic," says Roger J. Biemans, president of EnCana Oil & Gas (USA) Inc. In fields like this, the easy-to-get gas has long since been harvested by traditional drilling techniques. What remains are smaller pockets, often in geological formations so dense that the rocks have to be fractured and the gas pressured out.

EnCana turns these tricky conditions into opportunity by bringing together a variety of state-of-the-art techniques. To reach a cluster of smaller gas stashes, for instance, EnCana can drill horizontally. From a single site on the surface, the well can snake down and out sideways at varying depths, like the branches of an upside-down tree. As the drill pushes outward, EnCana relies on high-resolution "micro-seismic" data to guide it along fractures in the rock formation. Once the drill hits the gas pocket, fluids blended to match the geological conditions are pumped in to force out the gas. None of these tricks was invented by EnCana. "We just bring it all together better than anyone else," says Biemans.

With more active wells than any other company in North America -- about 5,000 -- EnCana can achieve unique economies of scale. "They're learning from each individual well that they drill," says Allan Stepa, a Calgary-based analyst at investment firm Salman Partners Inc. EnCana's massive land holdings also have saved on exploration costs, key for an outfit that has capital intensive drilling. PanCanadian brought to the merger huge tracts of land throughout western Canada, thanks to its late-19th century corporate beginnings as a railroad company. Now, EnCana owns 40 million acres of land in North America, in chunks scattered from the Canadian Northwest Territory down into Texas. That makes it the largest owner of oil-and-gas producing land on the continent.

Two things could knock EnCana off course: a precipitous drop in oil and gas prices or a takeover. Most experts believe that with demand from China and other fast-developing nations remaining strong, prices should stay high for a while. Still, Morgan has taken steps to gird for a downturn. EnCana is working with Premcor Inc., an Old Greenwich (Conn.)-based company, to refine sticky bitumen sooner in the production cycle and cut the cost gap with lighter crude.

Takeover speculation played a role in the 60% runup in EnCana's stock price over the past seven months, to about $67 today. EnCana's solid operating performance, its land, and proven reserves, would make for a nice addition to the portfolio of a cash-rich supermajor -- especially Royal Dutch/Shell Group (RD), which last year embarrassingly had to revise its reserves downward. But Morgan says he wants to go it alone: "We believe our shareholders will do better with us continuing to create the value we've been creating." It's hard to argue with his track record.

By Brian Hindo and Adam Aston in New York


Steve Ballmer, Power Forward
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