1 Hidden Risk That Could Shake EnCana Corporation’s Growth Plans

Earthquakes in the Duvernay Shale could impact the future growth potential of EnCana Corporation (TSX:ECA)(NYSE:ECA).

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According to a report by Bloomberg, energy producers in Alberta’s Duvernay Shale have a problem that could shake the region’s growth to its core. That’s because a growing number of seismic events have been linked to hydraulic fracturing in the region over the past few months. This could lead to drilling being halted, which would impact EnCana Corporation’s (TSX: ECA)(NYSE:ECA) future growth plans.

Shaking the foundation of shale

Alberta has seen a spike in seismic activity in recent weeks, and has linked this increase on the continued growth of production from the region’s Duvernay Shale. The region has already seen 18 quakes, with a 3.7 tremor hitting last December and another 4.4 quake last month. This occurred as companies like EnCana, Chevron, ConocoPhillips, and Royal Dutch Shell continued to test this emerging shale play.

However, as more earthquakes are being linked to hydraulic fracturing, it is causing regulators to take action. In Alberta, regulators are now asking shale producers in the region to take measures to reduce the impact of their activities when a quake of 2.0 on the Richter scale is felt. Furthermore, the Alberta Energy Regulator said that if a quake measuring 4.0 is felt, then producers must immediately halt drilling and can’t restart until they get approval from regulators. The big concern is that this could slow down the drilling programs of key Duvernay shale producers, like EnCana.

How this could impact producers

Encana expects the Duvernay to be a big growth driver in the future as it’s one of the company’s four core growth plays. This year the company plans to spend $250 million to $350 million to drill 15 to 25 net wells in the play. In addition to that the company has a joint venture that plans to spend another $800 million on the plays. All together the company expects these investments to yield a 200% increase to the company’s production from that play. Suffice it to say if drilling is slowed down due to quake that will have an impact on the company’s ability to meet its 2015 growth target.

Meanwhile, other producers like Chevron, Royal Dutch Shell, and ConocoPhillips see strong growth potential from this play. Chevron, for example, recently brought on a new partner  to help it fund the next phase of development from this play. Meanwhile, both Royal Dutch Shell and ConocoPhillips have large acreage positions in the play, which have the potential to deliver strong growth in the future. However, the big difference between these three and EnCana is the fact that the Duvernay only represents a small portion of their overall production due to their massive size and global scale.

Further, not all of these producers are pouring money into the play right now and ConocoPhillips has pulled back on the play in light of low oil prices and is holding off until the price of oil recovers. The play was such a small sliver of production and wasn’t yet a key growth driver. However, pulling back is a luxury that Encana doesn’t have, as its prospects outside the Duvernay are limited.

Investor takeaway

Should regulators slow down the growth of production from the Duvernay shale, it would have the biggest impact on EnCana. As one of the company’s four core growth drivers, it can’t afford to have one of its core plays shut down by quakes. Needless to say, it will be interesting to see how these new rules impact the producer, as a drilling moratorium, even a temporary one, could be the difference between the company meeting or missing its 2015 growth targets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo owns shares of ConocoPhillips.

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