Encana Skirts North American Pipeline Mess to Protect Prices

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(Bloomberg) -- Encana Corp. has so far avoided the pipeline bottlenecks that are damping prices for Permian crude and Canadian natural gas, thanks to the company’s hedging program and transportation agreements.

The Calgary-based driller on Tuesday reported realized prices of $2.94 per thousand cubic feet last quarter, a 6-cent discount to gas traded on the New York Mercantile Exchange. The discount for western Canadian gas averaged about $1.34 in the same period as a shortage of pipeline space weighed on prices.

Encana also said it has “virtually no exposure” to expected oil pricing for Midland, Texas, through 2018 and “limited exposure” there to the end of 2019. Rampant production growth has strained pipeline capacity in Midland, the heart of the Permian Basin, sending discounts for the area’s crude to the widest in three years. The company has diversified its markets for gas and has pipeline connections in Texas.

“With the recent blow-out of Midland crude differentials, and with AECO remaining persistently challenged, we believe the strong realized pricing that was on display during the first quarter of 2018 should help differentiate the story going forward,” Chris Cox, an analyst at Raymond James, said in a note to clients. He rates Encana’s shares a “strong buy.”

Encana rose 3.7 percent to C$16.58 at 10:02 a.m. in Toronto. The stock had slid 4.7 percent this year through Monday, compared with a 4.3 percent drop for the S&P/TSX energy index.

The better pricing took the edge off of production that fell short of analysts’ estimates for the first quarter. Total output rose 2 percent to 324,400 barrels of oil equivalent a day, missing the 338,344 barrel average of analysts’ projections compiled by Bloomberg.

After spending about four years reshuffling its portfolio, Encana is now focusing on profitably exploiting its main holdings, which encompass the Permian and Eagle Ford in Texas as well as the Montney and Duvernay in Canada. Encana’s output from the Permian Basin, including in Midland County, jumped 49 percent during the first quarter versus a year earlier.

©2018 Bloomberg L.P.

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