Checking In on Our Shale Gas Neighbor to the North

Sometimes it seems that the natural gas producers are doing their darndest to keep gas prices depressed. Encana (NYSE: ECA  ) , Canada's largest producer, is a case in point.

Earlier this year, the company announced its plan to double production in five years. In line with those ambitions, Encana yesterday announced a $500 million increase to its capital budget and lifted 2010 production guidance by 2%. This is just one of countless companies aggressively ramping up drilling in resource plays like the Haynesville and Horn River shale plays. Given its size, though, Encana will have a much greater impact on North American gas supply than a mid-sized operator like Pioneer Natural Resources (NYSE: PXD  ) or Cimarex Energy (NYSE: XEC  ) .

Last quarter, I noted that Encana was well-protected from low gas prices by the hedges it has in place. That remains the case, but the highest-price hedges appear to have rolled off. Last year, the firm netted more than $7 per thousand cubic feet of gas, about double the prevailing gas price. This quarter, gas price realizations were $5.50 per Mcf, or 34% above NYMEX spot prices. Encana is also producing 17% fewer liquids than it was a year ago, so that increases the company's gas exposure.

That being said, Encana is still making decent money at $5.50 gas prices, as reflected in the $1.2 billion quarterly cash flow figure, which dropped only 15% year on year. The company's costs are running 17% below guidance year-to-date, which is pretty remarkable. Encana plowed nearly all of its cash flow back into operations, while spending a modest amount on share repurchases. That's just the life of an E&P company -- especially one looking to grow as aggressively as Encana is.

On the operational front, one of the most interesting items of late is the announcement that Encana will be pairing up with PetroChina (NYSE: PTR  ) parent CNPC in several of its Canadian resource plays. Usually, Encana is the larger partner in its joint ventures, but this marks the second JV with an Asian national oil company in 2010. Korea's KOGAS also farmed into some of Encana's Canadian properties earlier this year.

The Asian appetite for shale gas shows no signs of abating. Quicksilver Resources (NYSE: KWK  ) is reported to be in talks with India's Reliance Industries regarding a Horn River farm-in. Reliance has already struck JVs with Pioneer in the Eagle Ford and Atlas Energy (Nasdaq: ATLS  ) in the Marcellus, so this more than idle speculation.

The more leveraged Quicksilver needs an outside capital infusion more than Encana, but the latter firm certainly won't be turning its nose up at acceleration capital. Encana can squeeze a lot of costs out on a per-well basis, but shale gas development remains a hugely capital-intensive activity, and joint ventures are a very attractive form of financing. Expect to see more of these in the future.

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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