Encana moving rigs back into the Haynesville Shale

After pulling its drilling rigs out of Louisiana's Haynesville Shale because of high service costs for half of 2012, Canadian independent Encana is coming back to the play, the company revealed in an earnings announcement Thursday.

Encana has two rigs operating in the Haynesville, the company said, with plans to increase that to five rigs by the end of this year.

Encana said its costs have come down far enough for the company to make a profit at its forecast Henry Hub price of $3.75/Mcf.

In the fourth quarter of 2011, Encana's Haynesville gas production peaked at 605,000 Mcf/d after royalties, then declined by 23% as the company began pulling rigs out in the beginning of 2012. Encana's Q4 2012 production was 464,000 Mcf/d. The company has no reported oil or liquids production from the dry gas play.

Encana initially embarked on a large land retention program in the Haynesville and drilled six wells, which currently would cost about $13 million-$14 million for a 7,500-foot horizontal well, Jeff Wojahn, president of the the company's USA Division, said on a conference call to discuss Q4 earnings.

During the drilling hiatus of the past year, Encana spent time building its understanding of the cost and performance of those wells, which Wojahn said are in the "best sweet spots of the play." He said the company now estimates the supply costs would be in the range of $2.50/MMBtu.

Using a $3.50/MMBtu NYMEX price deck, Encana believes it could achieve a 30% rate of return, while $4/MMBtu would yield 40% "and that type of return would be reflective of what the current NYMEX price strip is for 2014," he said.

Wojahn said Encana's emphasis is now on determining how to capitalize and commercialize its Haynesville assets.

Bernstein Research analyst Bob Brackett sees more to the move than lower costs to drill in the northwest Louisiana play. He thinks the Calgary-based producer is losing confidence in the quality of its oil and liquids portfolio.

"We struggle to see any dry gas asset in Encana's portfolio as compellingly economic at its $3.75/Mcf outlook," Brackett said in a note to clients Thursday. "We believe a return to the Haynesville largely reflects Encana's poor liquids portfolio, rather than the quality of its gas assets (we'd prefer the Marcellus to the Haynesville)."

Brackett noted that Encana's descriptions of its results in oil and liquids plays lacked detail.

Meanwhile, Mike McAllister, president of the the company's Canadian Division, told the conference call Encana has no immediate plans to seek a buyer for its dry gas interests in the Horn River Basin of northeastern British Columbia. The basin was once viewed as the primary feedstock source for the Kitimat LNG project until Encana unloaded its 30% stake.

McAllister said Horn River is not a priority at a time when the company is putting 80% of its 2013 capital budget of $3.2 billion into liquids plays. He said Horn River, like all other company assets, would be for sale at "the right price."

Encana said it expects to collect $500 million-$1 billion from divestitures this year. It expects proceeds from last year's asset sales will yield C$5.7 billion ($5.69 billion).

Encana reported a net loss of $80 million in Q4 2012 compared with a loss of $476 million the year before when it was hit by a $1.19 billion impairment charge due to falling US gas prices.

Companywide, Encana said its gas production averaged 2.99 Bcf/d in Q4 2012, down 15% year over year, while its realized gas price slipped from $4.96/Mcf in 2011 to $4.84/Mcf in 2012, including hedges.

The company said its liquids production for the year rose 29% to average 31,000 b/d.