Chesapeake Energy rig site. Photo credit: Chesapeake Energy
North America's energy boom is creating lots of jobs. Many of these are overflowing into other industries. Unfortunately, not all energy companies are benefiting from the boom that is fueling energy-related jobs. That's pretty clear after Canada's largest natural gas producer, Encana (OVV 0.25%), announced that it was slashing its workforce by 20%.
Few companies misplayed North America's energy boom as badly as Encana. At the height of the natural gas price bubble the company decided to spin off its integrated oil arm into Cenovus Energy (CVE -0.19%). Since that time, Cenovus has become a great Canadian oil growth story. With a plan in place to grow its oil production by 11% annually through 2023, Cenovus has what Encana needs these days: high-margin oil growth.
In order to right the ship, Encana is slimming down. The layoffs are just one part of the process which also has the company slashing its dividend and refocusing its drilling efforts on the five regions that are richest in oil and natural gas liquids.
Encana isn't the first heavy natural gas producer that has been forced to make these deep cuts. Chesapeake Energy (CHKA.Q), America's number two natural gas producer, has been forced to cut 1,200 employees this year, which is about 10% of its workforce. As the company has significantly pulled back on its aggressive growth plans, it hasn't needed such a large employee base to support its "sharpened focus."
For Encana, its new focus will see it close its Dallas-area office by the end of the year. It will then concentrate its management in Calgary and Denver. The real issue is that unless a company is drilling for natural gas in the Marcellus Shale, the returns just aren't there. That's why we're seeing Encana backing away from places like the Haynesville and Barnett as it looks to natural gas liquids and oil to fuel future growth.
This of course isn't to suggest that we are seeing an end to the natural gas boom. Instead, we're simply seeing companies shift to where the profits are, and right now those profits are in oil or natural gas liquids. At some point other natural gas plays like the Haynesville or Barnett could again boom with production. We just need to see the price of gas high enough to make those plays more profitable.
This is a great reminder to investors that not all energy companies are actually benefiting from the North American energy bonanza. Some, like Encana and Chesapeake, were caught flat-footed by the natural gas price plunge and have had to regroup in order to grow. Others either saw the trend earlier or were simply in a better position to profit from the turn.
