An Oil and Gas Profit Factory

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In a summertime piece on Devon Energy (NYSE: DVN), I noted the huge rift between fast-growing independent E&Ps and the lumbering integrated oil companies. Well, if you've been seeking a happy medium, look no further than EnCana (NYSE: ECA).

Calgary-based EnCana officially became an integrated oil firm in 2007, thanks to its 50/50 oil sands joint venture with ConocoPhillips (NYSE: COP). Integrated, by the way, signifies that both production and refining activities occur in-house. This operation, which generated $1.3 billion in operating cash flow during the year, has been such a success that BP (NYSE: BP) and Husky Energy were moved to strike their own poetic partnership.

With an enterprise value north of $60 billion, EnCana is a bit bigger than the leading American independents, but it's still nimble enough to grow production and replace reserves to an impressive degree. In 2007, natural gas production (which accounts for over 80% of the company's output) rose 6%. The company replaced over 225% of total production at a drill bit finding cost of $1.65 per thousand cubic feet equivalent (mcfe).

That latter figure, which matches the achievement of the XTO Energy (NYSE: XTO) machine, got a big boost from the oil sands business. As we learned from Suncor (NYSE: SU), finding the bitumen is just the beginning, so don't get too excited about this bargain-basement number. Natural gas and natural gas liquids finding costs were closer to $2.40/mcfe.

Because EnCana focuses so heavily on unconventional resource plays, its drilling efforts are intensive. The firm's count of net wells drilled leapt 23% for the year and 62% in the fourth quarter. This won't single-handedly keep Precision Drilling Trust (NYSE: PDS) in business, especially since nearly half of EnCana's natural gas production will be in the U.S. this year. The well figure does support the notion, however, that North American natural gas drilling should continue to get ever more factory-like in the future.