EnCana, a mid-sized player in the North American oil&gas business (with about 700,000 boe/d of production, mostly gas in Canada, it is about one seventh of the size of ExxonMobil; same thing with its approx. $50 billion market cap) has posted late last week some financial guidance for next year, i.e. their estimate of future income and results.
Boy, it makes for depressing reading.
First, the good news:
- cash flow per share is expected to increase by a cool 16%
- dividends will be doubled in 2007
- number of wells is increasing by 17%
- production from the oil sands is set to increase by 44% in 2007.
Now the actual news:
- overall production is declining by 1% (would be stable without a sale of 50% of an oil sand project)
- investment is declining, from $6.3bn to $5.9bn (would be increasing slightly to $6.6bn without same sale)
- share buy backs will cancel about 5% of shares.
This with price hypotheses of oil in the $50-70/bbl range.
Which means that:
- despite a fast growing number of wells, production is stagnant. They are running ever faster to stay in the same place. Not a good sign;
- despite record oil prices, and despite increasing costs (or because of them), this oil company is seriously limiting its investments, and its production is shrinking. Those that argue that higher oil prices would lead to higher investment as producers take advantage of improved market conditions to increase production need to explain this one. Why aren't they investing more to take advantage of excellent market circumstances? Not a good sign either.
- of course, this does not prevent them from improving their returns on equity and blessing their shareholders with increasing returns. Existing production does generate cash, it's just that this money is used to buy back shares and pay dividends, i.e. give back money to shareholders. Which means that the company does not think that it can put that money to better use than investors. Again, this means no decent investment prospects;
Or to sum it up:
Big Oil is shrinking.
It is not finding places where to invest to increase production despite record prices, and is in the process of decommissioning itself slowly, returning its capital to investors.
Peak oil is already in the past for these guys.