Didn't see this coming....


On Friday, Canadian media reported that EnCana (NYSE: ECA) and its partner Royal Dutch Shell (NYSE: RDS-A) (NYSE: RDS-B) were looking to farm out over 130,000 acres of their Haynesville shale position to a partner. I don't blame you if you're confused by the move.

Just the other week, EnCana decided to pour more dollars (freed up by sagging service costs) into the Haynesville play. On the conference call, management identified the play as "one of the most important pieces in the future of EnCana's gas production." So what's the company doing selling down its stake?

Here's how I view this situation. During 2008, there was a massive staking rush in East Texas and Northwest Louisiana, with companies like Chesapeake Energy (NYSE: CHK) and Petrohawk (NYSE: HK) swooping in on areas believed to be good prospects for Haynesville production. EnCana and Shell also participated in the frenzy.

There are now several factors working against operators here. Lower gas prices are of course constraining everyone's cash flows. Haynesville wells, which are deep and complex, cost even savvy drillers like XTO Energy (NYSE: XTO) upwards of $7.5 million a pop. At the same time, these companies need to push ahead with development drilling in order to maintain their leasehold.

Farming out acreage thus starts to make a lot of sense in that context, especially when considering that in this early stage of exploitation, no one quite knows for sure where the boundaries of the play will ultimately be drawn. This Louisiana acreage appears to lie south of what's currently seen as the "sweet spot" in the Haynesville, however, so EnCana and Shell are unlikely to later kick themselves for letting a third party in to help shoulder the drilling budget here.

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Comment by SharonB T18N R15W S8 on May 20, 2009 at 4:18
Couldn't this just mean they own more than they can drill and need help with the drilling to get things held by production?
Comment by Les Bamburg on May 19, 2009 at 9:08
Omar, the following is my post from May 9th.

"In my opinion EnCana/Shell have grouped their acreage in three categories.

Category A - Acreage E/S have developed or intend to develop without outside assistance. Northern Red River, DeSoto, Bossier & Caddo Parishes.
Category B - Acreage E/S would like to develop but with some outside assistance (new 3-party JV). Sabine & Natchitoches Parishes. Newspaper story
Category C - Acreage E/S would like to sale or swap to another party. Far Southeastern corner of Red River parish. Online auction

Category C primarily consists of sections where E/S control less than 50% of the acreage and/or Samson is operator of the unit."

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