Share offering shows Encana’s heart moving deep into Texas

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Encana's board brought Doug Suttles to Calgary from Texas three years ago to untangle unwieldy operations and instill a new sense of focus.

If there was any doubt before, this week's $1-billion (U.S.) stock issue shows in no uncertain terms that a huge part of the Canadian company's future is back in the chief executive officer's native Lone Star State.

Half of the proceeds from the offering are earmarked for debt reduction as oil-price recovery creeps further away amid a chronic global glut.

The remainder will be plowed into operations in the Permian Basin of West Texas, a shale-oil trove known for inexpensive drilling and the potential to produce crude from several underground zones stacked on top of one another. That means a company can ply any of them from the same drilling pads, saving big on infrastructure.

In the Permian, Encana aims to get twice as many wells pumping crude in 2017 than it did this year, without having to rely on a big lift in benchmark U.S. oil prices.

The move comes after billions of dollars of asset acquisitions and property sales that leave the company – once seen as a proxy for Canada's oil industry – very focused on U.S. shale oil. It is also increasingly a draw for U.S. investors.

Indeed, the share issue was led by a pair of non-Canadian-based banks – Credit Suisse and JPMorgan & Co. – and structured as a marketed deal as opposed to a bought deal. That latter is more familiar in the Canadian oil patch.

Encana has retained two Canadian resource plays, the Montney and Duvernay liquids-rich gas deposits, but Texas is getting by far the most traction.

Mr. Suttles had been at Encana's helm for about a year in the summer of 2014 when he announced the company – long known for its Canadian and U.S. natural gas operations – was entering the Permian through a $6-billion acquisition of Fort Worth, Tex.-based Athlon Energy Inc. Months earlier, it snapped up acreage in the Eagle Ford region of the state for $3.1-billion.

Mr. Suttles took flak from some investors who had questioned the timing of the deals – months before crude began the slump that has relentlessly pressured the industry.

The company's share price rode a steady decline until the depth of the oil-price crash last winter, and along the way it cut staff and slashed its dividend. But it has since more than tripled from its nadir.

The commodity trough has left Mr. Suttles with a thorny problem, even as Encana concentrates on its most economical operations. That is: a sizable funding gap.

This year, the company has said it will spend $1.1-billion to $1.2-billion on operations. But, according to FirstEnergy Capital Corp. analyst Michael Dunn, cash flow will ring in at about $600-million.

Encana has garnered proceeds of $1.1-billion this year from asset sales in Colorado and in the Gordondale area of Alberta to fill the budget shortfall.

Now, with the corporate refocusing and need to pay down debt, Encana has fewer obvious asset-sale candidates, hence the decision to go to the market for 2017 capital spending needs, rather than gamble on an oil-price rebound.

Mr. Dunn points out that other Permian producers have also gone to market recently. Dallas-based Pioneer Natural Resources raised $827-million issuing shares in June. This month, Callon Petroleum, of Natchez, Miss., sold $422-million of stock to fund an acquisition of Permian properties.

Now, some U.S. investors are starting to view Encana as a look-alike opportunity, Mr. Dunn said.

"There's a party going on in the Permian, and Encana's starting to participate in it. Their peers were issuing equity, and their lead brokers thought Encana could as well," he said.

The last two years of industry malaise have not put Encana's employees and investors in a party mood. But if focus was an imperative for Mr. Suttles, it's tough to argue he hasn't accomplished it.