Energy Ink

Encana Corp. quietly marks 10 years

January 30, 2012

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What a difference 10 years makes. A decade after PanCanadian Energy Corp. and Alberta Energy Co. were joined at the hip to create Encana Corp., at least one of the commodities that fueled the merger offers investors about as much certainty as a game of ring-toss at a small-town carnival.

Certainly there are as many wild cards at play. As Encana last week celebrated 10 years of operations – one imagines the occasion did not warrant champagne, what with the state of the firm’s stock and so many vultures circling overhead – U.S. President Barack Obama was midway through a policy pirouette, announcing in his address to the nation that developing shale gas “will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy.”

Other choices are not so easily resolved. The Conference Board of Canada notes in its latest winter outlook this morning that U.S. economic growth could hit 2.7 per cent this year, up from 1.8 per cent in 2011, provided legislators in Washington find common ground on lower payroll taxes and other measures to stimulate short-term growth.

The outlook assumes Europe doesn’t slip from its current precipice into recession, a shaky proposition amid continued disagreement over how to engineer a controlled collapse of Greece. “There are obviously huge downside risks to the current outlook, given the poor track record of politicians in Europe and the United States for dealing with their respective debt challenges,” write Kip Beckman, principal research associate, and Paul Darby, deputy chief economist, with the Conference Board.

Scratch from your wish list, in other words, a short- or medium-term recovery in natural gas prices, at least one driven purely by demand. Even the ballyhooed production shut-ins announced last week by Chesapeake Energy Corp. and other gas titans – a development that has raised more than a few eyebrows on its own – offered only a “momentary floor” for prices, Bob Brackett of Bernstein Research told clients this morning.

The U.S. gas rig count remains above 750, and drillers targeting oil and liquids are increasingly producing so-called associated volumes of natural gas in spades. Brackett also calculates that one billion cubic feet of production curtailments is only enough to offset one degree of abnormally warm temperatures in the short-term. “That means one [billion cubic feet per day] of production curtailments need to occur for 4-5 months just to make up for January’s warmth,” he writes.

Producers are unlikely to exercise such restraint, Brackett concludes. He suggests that those companies that can stand to might even prolong the current price funk in an effort to starve industry weaklings, setting the stage for a round of consolidation in the fashion of Standard Oil and John D. Rockefeller. Brackett notes that the famed oilman, while keeping his thumb on prices, once quipped that a “good sweating” was “healthy” for Standard’s rivals. Investors might wonder whether Encana, fresh from a year of asset juggling, could stand to lose a few more pounds.

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