Replies to This Discussion

Permalink Reply by dbob on February 1, 2012 at 17:20

Les,

I assume you are referring to some of my posts here.  For the sake of discussion, I'll summarize my position on this, and you can pick it apart and help the crowd understand where I'm wrong.  

First, within the last two weeks, Encana has dramatically cut its land operations, survey operations, and other support operations, broadly speaking, across TX and LA.  These efforts are not at an end, but are dramatically reduced.  Encana has also told certain persons that their operated rigs count in Texas and Louisiana is going to drop to 1 to 2, and this was understood to mean all plays, not just Haynesville.  I have heard no mention of ending existing JV agreements, and as noted, Encana probably has those rigs under long term contract, so there is a possibility that any rigs they are dropping will be picked up by their JV partners.   I was not told a specific time frame that their rig count will drop, but I understand it to be the near term.  

These moves strongly suggest a move to conserve cash, in particular because the reports and information suggests Encana is substantially scaling back development in the liquids plays of Texas and Louisiana as well as the Haynesville.  

The move to conserve cash may in part, be due to a substantial backlog of potential drilling sites.  See page 5 of the Encana corporate presentation :http://www.encana.com/pdf/investors/presentations-events/corporate-... where they indicate a potential inventory of 50 years worth of reserves.

However, as Skip notes, and I agree, that the economics of liquids/oil would seem to favor simply developing those resources now, rather than scaling back the activity in a broad area.   A possible different inference is that they are going to put a lot of money in something else - The Michigan Basin Collingwood  Shale,  Triassc Monteny, Bighorn, or  Duvernay are all good candidates based on their presentation.  

Kittycatmama asked a few times about JVs in the CV.  I think the economics are better on projects with  a high liquids production relative to gas production.  That's why there are 200+ rigs in the Bakken, 200+ rigs in the Eagle Ford and continued decline the Haynesville rig count.  I'll admit that the economics in my CV vs liquids example will vary widely based on the depth of the well, and the liquids production, but the general example of shorter payback holds true.  

I'm willing to let this conversation site until the end of April, by which point I will either be proved to be generally accurate, or a fool.

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Permalink Reply by Hopeful About Natural Gas on February 1, 2012 at 21:55

Thanks guys,  As someone in the "crowd" I am fascinated by both of your comments. For example, I now better understand the economics of conventional oil vs gas.

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please do continue the debate - or, do we have to wait until April????

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"I worked with a group recently that drilled a 7000'  vertical well into a conventional oil formation.  I don't know IP, but that well is producing about 360 bbls/day.  total cost (I'm speculating) was in the $4 million range.  It will near payout 120-150 days after drilling.  

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If you drill a horizontal CV well, and get 8 mmcf/day, and 20 bbl condensate, but your cost is in the $8 million range and payout is 400 days or further out.  That CV horizontal looks a lot more attractive if gas gets to $4/mcf."

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Permalink Reply by Spring Branch,mineral owner on February 2, 2012 at 5:04

I have a hard time seeing how a 7,000' vertical well into a conventional resevoir could possibly cost $4 million.

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Permalink Reply by dbob on February 2, 2012 at 5:10

That was a guess on my part - 11 days of rig time, modest completion costs, and some special out of the oridnary land costs.  Of course, prospects that produce at that rate are few and far between. 

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Permalink Reply by Les Bamburg on February 2, 2012 at 4:15

Dbob, my comment was not necessarily directed at your posted information.  I do not disagree that EnCana is cutting back on dry gas drilling in Texas and Louisiana similar to most other operators.  For people to assume EnCana is in deep financial trouble and likely to be bought out by a major player is an over-reaction in my opinion.  All operators reallocate capital and people resources as circumstances change and EnCana will be part of a project starting this year in Canada that requires billions of $$ over the next few years.  All of their current assets in Texas and Louisiana are dry gas plays with essentially no liquids uplift including the Deep Bossier in District 5.  So this cutback makes sense economically.  Most of their acreage is HBP'd so there is no loss of assets associated with the drilling pullback and leaves these gas reserves for later development.  EnCana may continue to invest some money in the Haynesville Shale depending on the drilling activity of their 50% JV partner Shell.  The Cotton Valley is not a predictable unconventional play and probably not that prospective over the EnCana acreage.  As you said they have plenty of other investment opportunities in their portfolio.

 

On another point, EXCO/BG's gas sales would be similarly priced as other operators in the play including EnCana/Shell.  The only variation is the level of hedging each operator has in place.  To date that has insulated most production from the low gas prices but will fade away in 2013.  BG purchased in the various shale plays to acquire assets similar to BHP, Statoil, ExxonMobil, BP, etc.

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Permalink Reply by Spring Branch,mineral owner on February 2, 2012 at 5:16

The TMS is clearly not a dry gas play and I suspect Encana will be moving a portion of their dry gas assets to that play.  In my opinion,  the rumor that Encana is cutting back activity in the TMS is bunk.  I'm guessing they'll be adding, not cutting back.  In the not too distant future, we'll know.  You can bet that EOG is not building a lease position in central Louisiana for dry gas!  Les, in my opinion Encana has a substantial lease position in San Augustine County, TX that is not HBP'd, though they could be long term leases with option periods.

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Permalink Reply by Spring Branch,mineral owner on February 2, 2012 at 15:47

Thanks, Mike.  I'm very familiar with it and have minerals in the area.  I don't think, however, that Central Louisiana is a dry gas play, but rather a "western TMS" oil play.

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Permalink Reply by Two Dogs, Pirate on February 2, 2012 at 15:50

Hope you are right SB.

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Permalink Reply by Spring Branch,mineral owner on February 2, 2012 at 15:53

As am I, TD,P.  As am I!

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Permalink Reply by Spring Branch,mineral owner on February 2, 2012 at 15:56

Mike R, the Angela River Trend is very deep, very hot and very expensive to drill.  The wells however are monsters if Goodrich's Nelson well is representative.

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Permalink Reply by Les Bamburg on February 2, 2012 at 8:36

SB, sorry I forgot about EnCana's position in the TMS and was thinking more of their Haynesville/Bossier Shale and Deep Bossier Sand plays that are both dry gas.  TMS could definitely ramp up in the future for EnCana along with some other plays.

 

I am more familiar with their remaining large acreage position in Louisiana that is primarily HBP'd so I will defer to you on the Texas acreage.  As you say they may have a plan to retain any of that acreage viewed as having long term value.

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Permalink Reply by Spring Branch,mineral owner on February 3, 2012 at 3:25

The one comment above that I would take issue with, dbob, is this: "These moves suggest a move to conserve cash in particular because Encana is substantially scaling back development in the liquids plays of Texas and Louisiana, as well as the Haynesville".  In my opinion, that is part of Encana's current problem.  They are not particularly involved in any "liquids" plays in Texas and Louisiana.  What they are doing is reallocating assets away from the dry gas plays of Texas and Louisiana that they are heavily involved in (including the Haynesville).  This is not a sign of financial weakness in my view, but rather financial common sense.  With nat gas @ $2.50, all the other Operators are doing the same thing, or soon will be.  My opinion is that some of the dry gas assets (rigs) will find their way to the only true oily play that is prospective nearby & where they have a substantial lease holding, and that is the TMS.  Others disagree!  That is what makes a horse race.  Keep in mind that the TMS, unlike other "liquids plays", will likely make very little natural gas, thus not compounding the nat gas oversupply problem.

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