ENCANA GOES UNCONVENTIONAL

Since becoming president and chief executive of EnCana Corp. last year, Randy Eresman has been transforming the Calgary company.

It is still one of the largest independents in North America, with daily production of 3.4 billion cubic feet of gas and 131,000 barrels of oil and gas liquids from assets in both the U.S. and Canada. But EnCana has exited its international operations, including a major discovery it made in the North Sea, and has sold all its offshore assets except its holding in Deep Panuke offshore Nova Scotia. The goal was to become a focused North American powerhouse in unconventional gas and heavy oil. First-quarter cash flow was up 15% to US$1.8 billion, and return on capital employed was a hefty 21%. Core capital spending this year on continuing operations is set at US$1.48 billion.

Born in Medicine Hat, Alberta, Eresman started working for Alberta Energy Co. as a well-tester in 1980, armed with a geology diploma from the Northern Alberta Institute of Technology. In 1984, he earned a bachelor's in petroleum engineering from the University of Wyoming, and returned to AEC on contract.

When AEC and PanCanadian Energy merged to form EnCana in 2002, Eresman became executive vice president for the onshore North America division, and then chief operating officer. His unconventional-resource pursuits soon singled him out for the top job.

EnCana's assets now range from tight-gas drilling in Colorado's Piceance Basin and Fort Worth's Barnett shale, to a new joint venture that marries its heavy-oil production in Alberta with ConocoPhillips' U.S. refineries. It has shallow-gas fields in Saskatchewan, a traditional stronghold for the company, where injecting CO2 makes Weyburn Field the world's largest greenhouse-gas sequestration project.

Eresman says he is reading a great deal lately about the technologies associated with handling CO2 emissions. "We have a special group looking at energy efficiency and how we reduce our company's carbon footprint. It's important for me to understand the technology so I can talk about it."

Oil and Gas Investor visited recently with Eresman on what's ahead for the company.

Investor In what way is EnCana unique in the oil patch? You certainly haven't taken a cookie-cutter approach.

Eresman We've highly differentiated ourselves in recent years, with our change to focus on unconventional resources onshore North America, as opposed to our peers who had to go offshore or international to grow. We've demonstrated that there is a very large unconventional-resource base in North America that fits the core competencies of both companies that became EnCana-Alberta Energy and PanCanadian-and we can effectively extract value from that resource base.

In the four years since I've been COO and CEO, we've sold off our international operations and offshore assets, except for Deep Panuke (a gas project offshore Nova Scotia), which still fits the low-risk character of our portfolio.

Investor Is there an EnCana way?

Eresman The way we do things is characterized by giving a great deal of clarity to the boundaries and conditions within which our people operate. We give them very clear financial and operational expectations for pursuing the best opportunities that meet our hurdles and fit our objectives. In this way, we ensure that people are focused and are not constantly distracted by other kinds of opportunities that we would not pursue anyway. We stick to our core competencies and, with that focus, our teams understand what it takes to have projects approved.

That same focus is the reason we decided not to build upgraders for our oil sands (in northern Alberta). That's a business we don't know much about. Yes, we could have hired people who do have the expertise, but we're best at getting resources out of the ground and solving the associated technical challenges.

Investor How would you describe your management style? You've been called bold.

Eresman What we have really done is to lower the risk profile we're exposed to by focusing on what we are best at and by taking control of all variables that could affect our outcomes. For instance, we mitigate risk on commodity price by entering hedges. We minimize risk in exploration because of the kind of resources we pursue.

We control capital risk by developing technology, focusing on operational efficiencies and undertaking large-scale operations.

Investor What led you to unconventional gas as a focus?

Eresman We saw the unconventional prominence as inevitable after seeing the price impact of declining conventional gas production. We saw an opportunity being created, based on security of supply issues and because international opportunities continued to demonstrate higher risks and lower returns. We saw unconventional resources as having lower risk, with higher long-term return potential.

Investor Who have been your mentors and role models?

Eresman I had lots of them throughout my career, most of which was spent on the technical side. I encourage mentoring and people to have mentors. I have had great role models and had poor ones, and in pursuit of success I've learned from both. I've learned something from everybody I've worked with.

Investor You've quickly taken the reins, quietly instituted a reorganization and implemented a plan with six strategic business divisions. Where will this take you and the company?

Eresman You never just "do anything." As COO, I was given significant range to make changes-the strategy's origin is now four to five years old. As CEO, I have been able to complete them. The divisions clearly define the character of the businesses within our company, which would otherwise appear to be a collection of disconnected assets assembled over a long period of time.

The reorganization was created to present a clear story to the investment community about the different businesses we operate. Our U.S. business and our Canadian Foothills business are both high-growth in unconventional natural gas; effectively they are senior independent oil and gas companies and should be compared with their peers.

It was important to separate these two high-growth divisions from our mature assets in southern Alberta, which are more comparable to royalty-trust assets. It's important to be able to show that as high-cash-flow generating assets, the mature properties should be compared against another set of peers.

Finally, our oil-sands assets should be compared against integrated peers. By doing so, we believe EnCana will ultimately be valued differently than other senior companies because it has these clearly defined kinds of assets with clear market comparability. This gives the investor another way to value the company.

We believe EnCana should be looked at as a sum of these parts and be given a premier valuation once this is fully understood.

Investor What about the uncertainties in the oil sands today? There are new federal and provincial environmental initiatives, concerns over greenhouse-gas emissions, provincial royalty reviews, a provincial virtual carbon tax, a dramatic labor shortage and an equally dramatic rise in costs.

Eresman Yes, we are concerned about the cumulative impacts of all of the additional costs and burdens placed on the oil sands. All of those are near-term concerns affecting the public policy discussion right now.

The biggest one affecting the oil sands is the critical labor and trades shortage along with the lack of infrastructure. This has had a spillover affect in the rest of Western Canada, causing a construction boom and high inflation.

As for the provincial royalty review, there's not as much room to move as the average person might think. People are seeing great financial returns in all oil and gas companies, yet those returns largely relate to historical investments. With the current investment environment, oil-sands projects are struggling to get risk-adjusted returns in excess of their cost of capital.

Regarding the additional hurdles and risks associated with changing regulation as applied to the oil sands, I believe the impact on the economics of these projects will be that some companies will slow down some future development plans. There isn't that much room in the overall economics of the projects and, if many more burdens are applied, you will see more companies backing off and slowing down.

Investor Would you consider that for EnCana?

Eresman We would, if our return expectations fell below our targets. We will carefully look at them to understand what their impact may be, and what alternatives there may be to meet whatever CO2-emission-reduction targets are set.

Despite all the changes, including any negative consequences of royalty review and increased costs, we're better prepared because we are among the lowest-cost in-situ oil-sands producers.

Investor How is that?

Eresman On costs, we have the lowest steam-oil ratio, because of how we manage our projects, and because of our downstream oil-sands integrated portfolio. However, because our projects are remote and located away from the large amount of oil-sands activity near Fort McMurray, we wouldn't likely be as well positioned to participate in CO2 capture and sequestration. It is easier to gather a large volume of CO2 in concentrated refining and production locations such as Fort Saskatchewan or Fort McMurray.

Investor Yet, you have the experience of CO2 miscible flood, and sequestration, at Weyburn Field in Saskatchewan.

Eresman We've gained a great deal of experience in Weyburn. There are a limited number of places where you have economic and readily available sources of CO2, and locations where you can use it. We're well positioned to provide technology to support those. There's a reasonable analogy to the gas-storage business, where our company has historically built up expertise.

Investor How does the partnership with ConocoPhillips work for EnCana?

Eresman We are able to provide a supply of oil to refineries that can be expanded to accommodate more oil, and we've reduced the risk from each of the companies in the process. We were very concerned about the cost and value proposition of building upgraders in Western Canada, and they were looking for a long-term supply of oil as well as the opportunity to expand their knowledge of steam-assisted gravity drainage.

The biggest challenge of all was in achieving an equivalent value in assets being exchanged.

Investor What role does the Piceance Basin play in EnCana's portfolio?

Eresman It's an area with a tremendous amount of gas. We have taken a long-term growth approach as part of our Rocky Mountain position. The gas close to existing development generates very high returns on our investment. The gas further away from infrastructure is more economically challenged. With improved infrastructure and continued development of technology, it's one of our long-term high-growth areas. Some parts of the Piceance will always have marginal economics, so we're looking at different ways to enhance value.

Investor How about the Barnett shale in North Texas, and the Deep Bossier play in East Texas with Houston-based Leor Energy?

Eresman Our work in Texas has grown significantly in the last three years. This year in the Barnett shale, we are focused on drilling the core area, where high activity levels have continued to pressure inflation and project economics. We plan about 70 wells this year and production is expected to average about 115 million cubic feet per day. We are maintaining a relatively consistent level of drilling activity, leveraging the cost benefits of our fit-for-purpose rigs, focusing on reducing cycle times and improving overall costs.

In East Texas, we have about 673,000 net acres in this tight-gas, multi-zone play targeting the Bossier and Cotton Valley. We see the Deep Bossier as a new exploration play where we've had encouraging results and some very productive wells. In 2007, in East Texas, we plan to drill about 30 wells and are targeting average annual production of about 135 million cubic feet per day.

Investor If you weren't the CEO of EnCana, what might you be doing now?

Eresman Had I not lived beside the industry in Medicine Hat, I may have done something else. I initially set my sights on becoming an electrical engineer.

At some point in time, it would be interesting to get into business with my children. Both are at the University of Calgary studying business, but that's in the future.

Investor What makes EnCana a choice for investors now?

Eresman Having made all the changes, and completed our transformation to be a leader in North American unconventional gas and integrated oil sands, we are now set for a pace of development that's highly sustainable-under a variety of commodity-price conditions. We have a growth rate that should appeal to value-based investors and also reward growth investors through our rather attractive per-share growth rate.

We're targeting absolute growth of 5% per year. We believe we will add to that on a fairly regular basis, from free cash flow, several percent of additional growth through the purchase of shares, and complement that with an attractive dividend.