Bleak Earnings Behind, Encana Focuses on Bright Liquids Future

There wasn't too much surprise when Encana (NYS: ECA) released earnings last week. We were all waiting to hear how badly the company, one of the top five natural gas producers in the U.S., had been crushed by bottom-dwelling methane prices in 2011. Earnings weren't great, but Encana did make a few important announcements that should bode well for the future.

2011 recap
Encana's total production was up 5% over last year, to 3.5 billion cubic feet per day, but given the price of natural gas last year, this isn't necessarily great news. The company had a rough fourth quarter, reporting a net loss of $246 million. Net earnings for the year came in at an abysmal $128 million, a painful number to acknowledge when compared to last year's earnings of $1.2 billion.

But, there were some positive signs, too. The fourth-quarter loss wasn't as bad as last year's fourth-quarter loss of $469 million. The company also made an important $515 million investment in liquids-rich properties, and divested $2.1 billion worth of assets. The move towards liquids is crucial if Encana plans to make any money in 2012. With that, let's take a look at the company's plan for the coming months.

Strategy: 2012
First and foremost, Encana is cutting its North American natural gas supply. We've already seen a fair bit of this industry-wide, with Chesapeake Energy and Ultra Petroleum also announcing production cuts.

Encana will immediately stop production on wells producing 250 million cubic feet per day, increasing cuts up to 600 Mmcf/d as the year goes on. The company acknowledged the duration of voluntary reductions was subject to natural gas prices, and therefore could not say how long they would last.

Overall spending for 2012 will drop to $2.9 billion, a 37% reduction from last year, and in line with the previously-stated company goal of reducing spending by about $1 billion. More than 55% of the budget will be aimed at increasing liquids production.

Encana was also happy to facilitate yet another foreign company buying into American shale gas, signing an agreement with Mitsubishi (OTC: MSBHY) to develop its Cutbank Ridge assets in British Columbia. These are the very same assets from the failed deal withPetroChina (NYS: PTR) last summer.

The new deal with Mitsubishi is a solid one. Encana sold a 40% stake in its 409,000 acres for $2.9 billion. Mitsubishi will pay $1.45 billion up front, and invest the balance in development over the course of five years. Sharing development costs is a great way to maintain production levels when you don't have enough money.

Foolish takeaway
At the end of last year, I wrote that I considered Encana a solid turnaround play. An emphasis on lucrative liquids production can transform its balance sheet, regardless of how much it cuts natural gas production. The question that ultimately remains is: Can Encana develop its liquids-rich properties fast enough to make a difference on the bottom line this year?

It is certainly a story worth following. Click here to add Encana to MyWatchlist and stay up to date on company news and analysis.

At the time thisarticle was published Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter, where she goes by @TMFDuffy.The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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