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There's something about EnCana that needs work
By DEBORAH YEDLIN
Friday, November 21, 2003 - Page B2
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Something at EnCana Corp. doesn't quite add up.
On the one hand, as those attending the company's annual investor update found, not only has EnCana boosted production, repurchased shares and shifted its management compensation system to one that better aligns pay with performance, it also has a bevy of interesting opportunities that will boost reserves and production in 2004 and beyond.
And yet, despite this, its share price stays mired in a bitumen field.
An investor who ponied up for an EnCana share a year ago at $44.85 is looking at a relatively paltry gain of 4.3 per cent based on yesterday's close of $46.80, even though commodity prices have been on a tear in the past 12 months. In comparison, the S&P/TSX energy index has risen 17 per cent in the same period.
The adage that a rising tide lifts all boats -- in this case, oil patch stocks because of high commodity prices -- seems to have held for the juniors, royalty trusts and integrated companies, but not for the big-cap variety that includes not only EnCana but Talisman and Nexen, too.
It was this gap that the investor updates held in Calgary and New York this week sought to address.
The first place to start, according to CEO Gwyn Morgan, was with the recognition that the future of the industry in North America lies in companies focusing on "resource plays" instead of looking for conventional reservoirs.
So what's new about this? After all, the last time most of us checked, oil and gas stocks were resource plays.
But that's not the case according to EnCana, a position that arguably reflects the challenges faced by energy companies to add reserves and production in Western Canada, where these yardsticks are at half the level they were five years ago.
And that's despite a couple of years where drilling activity was at record levels.
So, in Mr. Morgan's world, it means companies need to recognize they may have to be content with less while being more efficient at getting the stuff out of the ground. Sifting through the rhetoric, it becomes clear that EnCana, with 60 per cent of its asset base falling into the resource-play definition, is becoming more of an exploitation company.
And the way to make money at that is by drilling lots of wells to drive costs down on a per barrel basis. But it also includes, in EnCana's case, going after some of the deeper, more difficult and unconventional reservoirs that may reach depths equal to the height of two Empire State Buildings.
But where the EnCana folks got really excited at this week's sessions was about the tax and regulatory changes recently announced in British Columbia, because they come as EnCana is about to begin working on its Cutbank Ridge play -- the one associated with the province's largest land sale in its history, which took place in September.
"It used to be," said Mike Graham, who heads the Foothills and Frontier region for the company, "that B.C. stood for Bring Cash. Now it stands for Best Choice."
Although there is no doubt that its Greater Sierra Play in British Columbia and the newer one in Cutbank are two exciting growth areas for EnCana, its share price is suggesting the market isn't convinced that current production growth rates of 10 per cent are sustainable, especially if the company is counting primarily on North America for the growth.
At some point, does it need to take a page from arch-rival Talisman and start looking for more opportunities overseas?
"The pressing concern is what's beyond the resource plays in terms of future growth," said research analyst Chris Theal of Tristone Capital Partners.
It also doesn't help, Mr. Theal noted, that production growth of 10 per cent was promised after EnCana's merger with PanCanadian, but that to get there the capital expenditure budget needed to be increased by $400-million.
Fundamentally, there's nothing wrong with EnCana, but it is still in the "show me" phase of its corporate history, even though the merger is almost two years old. It's made some good decisions over the year to sell non-core assets, but the challenge is how to use the capital and get an even better return. And for that, there is no easy answer in the oil patch, even with the promise of Cutbank because its results are still a few years out.
What EnCana is facing is nothing new: It's simply hard to add value when a company is as big as it is. Perhaps it's a question of adjusting expectations and recognizing that consistent growth of 7 or 8 per cent each year is a more realistic target and that to reach further pushes the company into the realm of diminishing marginal returns.
And that ultimately results in grumpy shareholders and really crummy stock prices -- neither of which are acceptable to Mr. Morgan and his crew.
dyedlin@globeandmail.ca
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