Canadian-based oil & gas producer Encana Corp. (NYSE: ECA) announced today that it planned to expand its 2012 capital spending budget by $600 million in order for the company “to take advantage of positive initial results achieved in a number of oil and liquids rich natural gas plays.” Encana also expects to increase total liquids production by 7%, to 30,000 barrels/day.

The company’s drilling plan for 2012 called for 40-45 new wells and has now been expanded to 115-120 new wells in 10 plays focused primarily on oil. Encana also said it would drill 350 oil and liquids-rich wells in 2013.

Encana’s expanded drilling program could benefit the services companies like Baker Hughes Inc. (NYSE: BHI), Halliburton Co. (NYSE: HAL), and Schlumberger Ltd. (NYSE: SLB), but a bigger knock-on effect may hit some of the company’s neighbors in the various plays where Encana will be drilling.

For example, in the Eaglebine shale play in East Texas, the company plans to drill a dozen wells in 2012, of which four are already producing 165-230 barrels/day each of light oil. Gastar Exploration Ltd. (AMEX: GST) holds acreage adjacent to Encana’s property as well as near a well drilled by EOG Resources Inc. (NYSE: EOG) that is rumored to have an initial production of 1,000 barrels/day of oil.

Likewise, in the Tuscaloosa Marine shale of Louisiana and Mississippi, Goodrich Petroleum Corp. (NYSE: GDP) holds a sizeable stake. Chesapeake Energy Corp. (NYSE: CHK) holds properties adjacent to Encana’s holdings in the Utica shale play in Ohio. Encana has plans to drill a total of 12 wells in the Tuscaloosa Marine play, of which 2 are completed and producing 930-1,080 barrels/day of light oil.

Encana’s announced increase will take the company’s 2012 capital spending to $3.5 billion. What worries investors is that the company’s forecast cash flow is also $3.5 billion for 2012 and that Encana’s capex forecast for 2013 has been raised to $4-$5 billion on cash flow of $2.5-$3.5 billion. The company said it will divest assets worth $1-$1.5 billion in 2013.

That’s a pretty big bet and in order for the bet to pay off, natural gas prices will almost certainly have to rise. If the oil and liquids don’t come in as strong as current production indicates, Encana could be in for some pretty tough times.

Shares are down more than -8% at $19.90 in a 52-week range of $17.02-$32.23. Volume is nearly 12 million shares already today, compared with an average of around 7.6 million shares traded.

Paul Ausick

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