Interview: Encana
>> welcome back. encana is selling its business in the united kingdom for $2.1 billion and plans to sell businesses in ecuador and the gulf of mexico next year to focus on its north american natural gas and oil be projects. to talk about the deal, the chief executive joins me. you are the largest natural gas producer in north america. wanted to begin on this deal. why are you selling these assets to redistribute elsewhere? that’s the driving force?
>> when we look at the history of our company, we really have built ourselves on what we call north american resource place, unconventional resources of gas and oil and we find we have a tremendously strong portfolio to grow the business on and our international operations became expendable and we felt this was a good time to sell them.
>> is that because the price of oil is so high?
>> certainly the international asset market is very strong and these are all oil assets we’re talking about.
>> how much do you expect to get from the sale? all the sales?
>> we got―we haven’t said what that number is. but these are considerably -- these are large assets so there’s―we’re probably about halfway there.
>> ok. now, will you be repurgating some of your own stock with the proceeds from these sales? what you’re putting in the neighborhood of $2.1 billion. >> what we said was that we’ll balance the use of proceeds about equally between the purchase of shares, repurchase of shares and paying down debt. we’ll do that with the $2.1 billion we’re getting in now and the money from the balance of the large assets sales. >> i want to turn attention to the bloomberg terminal. you know the chart of natural gas prices. we’ve talked about oil but this is a six-month chart of natural gas and what we show is we’re now at―i don’t know how far back you have to go―we’re now at $8.72 per million b.t.u. this is a skyrocketing price, we were at $4.50 in mid september and prices have close to doubled for natural gas in two month. what is driving this?
>> there are a number of things driving it. one of the big catalysts was the hurricane itself, hurricane ivan. we were working along towards reasonably the price was $4.50 and there was concern about reaching full storage in north america before the end of the storage season if you like, in other words, before winter. hurricane ivan changed that quite a lot and pulled production offline so now we’re going into winter and we have winter weather prospects in the future and i guess people forecast that for those of you that live in the northeastern united states, it might be pretty cold and that’s built into the futures price.
>> you trimmed your 2005 capital spending. will that impact your ability to drill wells next year, especially with the really high natural gas prices, with a four-year high right now?
>> it will mean we drill a few less wells. we’re trimming really keeping our capital budget almost the same but having to absorb a higher increase in service costs and supply costs including, of course, the price of steel. so we’re having to absorb that within our program. that means a few less wells. we drill more wells than any other company in north america, about 5,000 a year, in fact, so we might cut that back by 5% or 10% but we’ll still build a lot of wells and bringing on new gas production. we expect our natural gas production to grow about 15% to 16% this year and the same next year and that’s a huge growth in north american natural gas.
>> just to return to the chart for a second. when you have the price of natural gas almost double in six weeks, i just want your sense, is part of this a bubble? is this a reaction to what’s happened in the crude oil market and it’s really supply and demand not justifying the expensive level of natural gas?
>> there is an interrelation between natural gas and oil prices. actually, for quite a while, we had the disconnect in the other direction. most people can think of it simply, a little oversimplified but you can use the analysis, there’s about a six to one relationship between the energy value of gas and oil so if gas is at $8, that would imply about $48 oil so you can see the correlation there. however, having said that, there’s also a question of north american supply and demand that really also sets gas prices. sometimes it can disconnect from the lower side and sometimes overshoot on the upside.
>> has it overshot on the upside right now?
>> it has overshot on the upside on a b.t.u. equivalent basis temporarily with summer reduction of oil prices. the bottom line here is that the market sets the price based upon expectations and demand over the coming season and the actual overriding factor is that natural gas production in north america seems to have peaked. despite all the drilling going on, with the exception of a very few companies like encana, production is flat or down. so north america seems to have a problem, a supply-demand imbalance.
>> our thanks to gwyn morgan, encana c.e.o.
