Natural gas giant Encana Corp. has launched a cost-cutting spree, hoping to re-establish itself as the natural gas industry's best operator and draw skeptical investors back to its flagging stock.
The company, which remains one of North America's largest natural gas producers despite its recent push toward oil and commodities such as propane and butane, expects to knock out $100-million to $150-million in general and administrative expenses and "indirect operating cost reductions" in the next couple of years, interim CEO Clayton Woitas said during Encana's first quarter conference call.
Natural gas prices have rallied this year, injecting a small dose of optimism into an industry that has battled low prices and oversupply for years. Encana, however, has not been able to lure back investors who lost patience with its wavering strategy.
The Calgary-based company reported a first-quarter loss of $431-million (U.S.) on Tuesday and its stock dropped despite posting an operating profit.
Talisman Energy Inc., one of Encana's competitors in North America, is also rewriting its strategy and trimming expenses. The cautiousness demonstrates how energy executives and potential investors remain nervous about natural gas prices and their ability to stay strong.
"Encana is first and foremost a natural gas company and we're striving to regain our reputation as the lowest-cost and most efficient developer of natural gas," Mr. Woitas said. "Encana already has low cost structures in many of its plays, but the status quo is not an option."
Sherri Brillon, Encana's chief financial officer, said the company will manage costs by hiring internal candidates when managing attrition, retain only the most necessary consultants and contractors, and review its travel and expense policies.
The company, which expects to wrap up its search for a new CEO by the end of June, pledged more than just the $100-million to $150-million cost reduction. "Over time, we expect to see an additional 10-per-cent improvement in our company-wide average capital and operating efficiency number," Mr. Woitas said.
Encana's quarterly loss, which translates to 59 cents a share compared with a 2-cent profit last year, is "largely due to mark-to-market accounting of the company's unrealized risk management position and a non-operating foreign exchange loss," the company said. Its operating profit totalled $179-million and cash flow came in at $579-million or 79 cents a share, the company said.
Encana shares closed at $18.96 on the Toronto Stock Exchange, down 1.7 per cent Tuesday, despite generally warm reviews from analysts about the latest quarter. Investors, Ms. Brillon said, have told the company they are waiting for it to reveal its new CEO and strategy before jumping back in. But, she added, investors are cool to Encana's competitors as well.
"I think there's a bit of a holding pattern even across the energy sector relative to investing right now," Natural gas has certainly had its challenges, although we're seeing some optimism in price," Ms. Brillon said in an interview, noting that oil companies are also under pressure. "I think that it is not particularly a sector that has been in huge favour."
Encana on Tuesday said it has locked in 1.5 billion cubic feet a day of its 2014 natural gas production at $4.19 per 1,000 cubic feet.
It also has hedges in place at $4.39 per 1,000 cubic feet in 2013 and additional hedges for 2015. While the company's hedging plans helped it stave off extreme pain when natural gas traded near all-time lows, investors may worry the hedges mean Encana will miss out on a price rally.
Encana also announced that chairman David O'Brien will leave the board when a new CEO is installed. Mr. Woitas will take over as chairman.