In February, Encana Corp. unveiled a deal that promised to inject new life into Canada's biggest natural gas producer.
A proposed $5.4-billion joint venture with China's largest oil and gas company stood to fast-track production at some of Encana's vast natural gas reserves in northern British Columbia. By partnering with PetroChina International Investment Co. Ltd., a unit of PetroChina Co. Ltd., Encana would tap the deep pockets of a global energy company to speed up a major project and avoid stretching its own finances.
The deal, however, collapsed in June as the two sides could not agree on the details.
Encana's failure to secure the partnership put the spotlight on a Canadian energy giant struggling to recapture its past success; since then, scrutiny of the company's record and future strategy has only intensified.
Now Calgary-based Encana is bumping up against its self-imposed debt ceilings, coping with a wilted stock price, and expected to sharply scale back spending. Without a quick upturn in natural gas prices, which appears unlikely, the company risks being forced to pull back on exploration and slow production growth as it grapples with a chronic industry supply glut.
Critics are pointing to Encana chief executive officer Randy Eresman, and argue the once-celebrated energy company lacks the focus necessary to solve its problems.
"Randy Eresman has changed his strategy four or five times in the last year," said Laura Lau, an energy and resources fund manager at Sentry Select Capital Corp. in Toronto. "He's getting pretty close to capitulating on most of his plans."
Phil Skolnick, an analyst at Canaccord Genuity, said shareholders aren't sure of Encana's game plan.
"Investors don't really know what their strategy is, and [Encana is]just trying every day to figure that out and restructure their strategy," he said.
Encana says it still wants to take on partners for some of its gas reserves, including a slice of the project that was part of the PetroChina package. Further, North America's second-largest gas company has ramped up its efforts to look for oil, a commodity it jettisoned in 2009 with the spinoff of oil sands concern Cenovus Energy Inc. Encana also wants to jack up production of liquids-rich natural gas, after hinging its future on so-called dry gas in 2009. And after ditching its international assets, it is now looking outside North America for new plays. On top of it all, its plan to double production in five years, announced over a year ago, has been declared untenable.
"When you do have a company that keeps on changing their strategy, it is a good idea to stay away because you don't know what they are going to do next," Ms. Lau said. "They used to be the go-to name."
In an interview, Mr. Eresman sharply dismissed accusations the company lacks a cohesive strategy, while defending the company's moves during the PetroChina proposal.
Encana, Mr. Eresman said, is better off without China joining its operations at its Cutbank Ridge project in British Columbia.
The proposed deal included production of 255 million cubic feet of natural gas per day, proved reserves of about 1 trillion cubic feet, and about 635,000 acres of land. It also came with 3,400 kilometres of pipeline, and processing and storage facilities.
Encana only wanted to strike a deal on the wells already pumping out natural gas, Mr. Eresman said. However, the North American powerhouse was willing to share more than it wanted because it was also attracted to the potential for future opportunities with a global energy giant.
"The [deal's structure]wasn't preferred," Mr. Eresman said. "But because of the magnitude of the deal, and what I thought, and what I guess we all thought, the opportunities were as … you relate it to value-chain items, you relate it to potential liquefied natural gas deals, future investments in China – all of those things are sort of rolling around in our mind. It seems like something you'd want to put a lot of effort into."
Encana, he said, had to effectively carve out a complete business – the producing assets, the undeveloped land, and the infrastructure – in part to appease the Chinese, and in part to limit its own tax bill. At the time of the announcement, key details remained unsettled – it wasn't clear how Encana would be paid, for instance, or who would run the project after the initial agreement, which would put it under Encana's leadership, expired.
"Now that the deal has gone away, we have invited a broad group of industry players to potentially get involved in just one aspect of it – which is the undeveloped resource," Mr. Eresman said. "This is what we really wanted to do, but because of the unique requirements of PetroChina, we had to structure the deal differently." PetroChina officials did not respond to numerous e-mails and phone calls to their offices in Beijing and Calgary.
Now Encana is has taken on more debt than it would like after two years of outspending its cash flow. For example, its debt was twice its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) at the end of June, which is greater than the company's target of less than two times.
As a result, Encana is expected to shrink its budget. Raymond James analysts predict Encana's 2012 budget will be between $3.5-billion and $3.9-billion, compared with its 2011 spending plans of between $4.6-billion and $4.8-billion, before selling assets.
Encana is now chasing a series of deals to reshape the company and its balance sheet. It wants to pocket between $1-billion and $2-billion (U.S.) this year selling assets, after accounting for money it spends on acquisitions. On Friday, Encana sold its stake in the Cabin gas plant in the Horn River natural gas play for $220-million.
Mr. Eresman changed his view on the company's growth prospects in April, when he backed away from plans to double production in five years, announced just a year prior. The company made the original forecast expecting the benchmark natural gas price to hover around $6.50 per 1,000 cubic feet (mcf), tested its ability to succeed if gas fell to $5 per mcf, but gas now trades around $3.60 per mcf. "We missed the speed at which the U.S. recovery was going to take place," Mr. Eresman said.
Encana says it has not abandoned this plan, but concedes it will just take more time to reach its goal.
Further, it is taking steps to boost growth. The company sees opportunity in its move into natural gas liquids, though its current holdings will be slow to make a significant difference to the bottom line.
Encana also has plans to enter the Asian market, where gas prices are significantly more lucrative. With hopes of creating an export market, Encana bought 30 per cent of a proposed liquefied natural gas export project off the coast of British Columbia in March.
Encana's prospects, Mr. Eresman argues, hinge on more than just commodity prices and joint ventures. He has long argued outsiders do not understand how well Encana can keep its costs down.
One of the company's latest tricks is to power its drilling rigs with natural gas rather than diesel. The company, with partners, developed two liquefied natural gas drilling outfits at its Haynesville operations – a global first, Mr. Eresman believes.
The company calculates that by using more natural gas, rather than diesel, it can reduce fuel costs between 20 and 60 per cent depending on the type of rig.
Right now, however, Mr. Eresman is irked at critics who argue Encana has lost focus.
"I think there's a perception that we are changing our strategy," he said. "We're not really changing our strategy. We are altering it to the reality of the market."