EnCana Beholds the Power of Hedging

By last February, XTO Energy's (NYSE: XTO  ) hedging wisdom was already bearing fruit. Now Canadian heavyweight EnCana (NYSE: ECA  ) offers another striking example of the power of a proper hedging program.

We may gripe about the destructive potential of derivatives, especially as they pertain to too-big-to-fail financials. But this quarter, they saved EnCana's bacon, plain and simple. Before the effects of hedging, EnCana's natural gas price realizations were $4.23 per thousand cubic feet. After hedges? $7.22 -- more than 70% higher!

The firm's take from closed-out positions approached $700 million, which equates to nearly half of capital spending in the quarter. EnCana's investment program looks equally well-supported going forward, with about two-thirds of natual gas production hedged through October.

Would the firm be able to get by without this derivative book boost? Probably, given the firm's low debt and the $2 billion available under its credit facilities. But considering the predictability of its repeatable resource plays, I don't see much reason to play it another way.

Speaking of plays, EnCana's all fired up about the Haynesville shale. (Yeah, I know -- take a number). The excitement surrounding this mecca of monster wells doesn't ever seem to ebb. Thanks to cost savings from industrywide pricing pressure on suppliers such as Schlumberger (NYSE: SLB  ) and Halliburton (NYSE: HAL  ) , EnCana and its partner Royal Dutch Shell (NYSE: RDS-A  ) (NYSE: RDS-B  ) have allocated more funds to this field. That pushes the Haynesville past Canada's Cutbank Ridge play to the top spot in EnCana's capital program.

One interesting point on the conference call was that killer initial production rates aren't the only things pushing producers like Petrohawk Energy (NYSE: HK  ) to plow ahead in the Haynesville. In order to hold acreage, there's no other option. Even drilling a well and waiting until a later date to hook it up to a gas gathering system won't cut it.

These operators are fortunate that the Haynesville happens to be one of the most economic plays in North America, but it's still an odd time to be boasting about 50%-plus production growth, no?

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


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