Encana Sees 3% Increase in 3Q11 Cash Flow
Encana continued to deliver strong operational performance and solid financial results in the third quarter of 2011, growing natural gas and liquids production by 6 percent per share from the third quarter of 2010. Encana generated third quarter cash flow of US $1.2 billion, or $1.57 per share, and operating earnings were $171 million, or 23 cents per share. Encana's commodity price hedges contributed $146 million in realized after-tax gains, or 20 cents per share, to cash flow. Total production in the third quarter was approximately 3.51 billion cubic feet of gas equivalent per day (Bcfe/d), an increase of 190 million cubic feet equivalent per day (MMcfe/d) from the same quarter of 2010.
"Encana delivered another excellent quarter in every aspect of its operations, achieving solid cash flow and operating earnings. Our third-quarter production growth of 6 percent per share puts us in line to achieve our 2011 targeted growth range of 5 to 7 percent per share. We are highly focused on core initiatives that will strengthen our financial capacity and position us for future growth. Through the expanded application of our resource play hub model – highly integrated and optimized production facilities that continually improve efficiencies – we continue to lower our capital and operating cost structures. The competitive sale of select midstream assets frees up capital for reinvestment in higher-return upstream projects. Recent transactions include agreements to sell a portion of our Piceance midstream assets and our interest in the Cabin Gas Plant for a total of about $800 million, and we are well advanced in the sale process for our midstream assets in the Cutbank Ridge area. The sales process for our North Texas Barnett shale assets is also moving ahead," said Randy Eresman, Encana's President & Chief Executive Officer.
Expanding natural gas liquids (NGLs) extraction and exploration on liquids-rich lands across North America
Encana is taking a comprehensive dual approach to growing liquids production – firstly, through extensive expansion of NGLs extraction from the company's liquid-rich natural gas production and, secondly, through an aggressive grassroots exploration program targeting oil and liquids-rich natural gas plays across Encana's extensive North American land base.
Deep Basin extraction projects target an additional 55,000 barrels per day (bbls/d) of NGLs by 2015
In the Deep Basin of Alberta and British Columbia, Encana has significantly expanded its NGLs extraction initiatives. The first step in this plan is scheduled to start up in December with the addition of about 5,000 bbls/d of NGLs production from expanded facilities at the Musreau natural gas processing plant. From its existing development plays, Encana expects to grow NGLs production by about 55,000 bbls/d by 2015, which would take the company's total liquids production from the current level of about 25,000 bbls/d to about 80,000 bbls/d. Beyond this, Encana is pursuing extensive organic growth through a diverse exploration program on the company's liquids-prone lands across North America.
Organic growth through promising liquids and oil exploration program
Encana is drilling about a dozen wells on five prospective liquids-rich and oil plays from Alberta to Mississippi – the Duvernay Shale in Alberta, the Niobrara formation in the DJ and Piceance basins in Colorado, the Collingwood Shale in Michigan and the Tuscaloosa Marine Shale in Mississippi. Early well results are encouraging and ongoing exploration drilling over the next few months will help define the scope and potential of these promising liquids-rich and oil opportunities and assist in determining the company's capital investment allocation in 2012.
"The tremendous operational success we've achieved by applying our extensive technical expertise in long-reach horizontal drilling and completions in natural gas reservoirs is highly transferable to growing production from liquids-prone reservoirs. We have a well-established methodology for extracting value from all our production, developing resource plays from the ground up through a low cost entry approach and through our relentless focus on lowering our cost structures. Over the next few years we expect to significantly increase liquids production in our portfolio," Eresman said.
Expanding joint ventures; Kitimat LNG project advancing
Encana continues to attract new third-party investment to improve project returns through the acceleration of the development of the company's enormous resource potential. In July, Encana expanded its Horn River farm-out agreement with the Canadian subsidiary of Korea Gas Corporation (KOGAS) at Kiwigana in northeast British Columbia. KOGAS agreed to invest a further C$185 million in approximately 20,000 additional acres of our promising Horn River lands. The original C$565 million, three-year agreement with KOGAS has enabled Encana to accelerate its drilling program in both the Kiwigana area of Horn River and at West Cutbank. In the Kiwigana area, drilling of the first well pad has concluded and, following completions work this coming winter, first natural gas production is expected in the spring of 2012. In the Kitimat liquefied natural gas (LNG) export project, progress continues as Canada's National Energy Board last week approved a licence to export 1.4 billion cubic feet per day (Bcf/d) of natural gas for 20 years. The Kitimat LNG engineering study is expected in the new year and the partners are discussing long-term sales agreements with Pacific Rim customers.
Efficiency gains with long-reach Louisiana wells
At Haynesville, drilling and completions efficiencies continue to improve in both the company's resource play hub development model and its remaining lease retention program. Encana received regulatory approval to drill additional long-reach horizontal wells in North Louisiana – a well-established technique that very effectively reduces supply costs and the number of wells required to produce an equivalent volume of natural gas. In the third quarter, Encana drilled two horizontal wells in the Sabine area of East Texas and two in the Haynesville in Louisiana. These wells are among the longest horizontal wells drilled in the region, averaging a horizontal length of 7,500 feet. One of the Haynesville wells surpassed 8,000 feet lateral length and a Sabine well reached a record measured depth of 22,350 feet. Each well is expected to have more than 30 completion stages – work that is planned for the fourth quarter of 2011.
Focusing on highest return projects and lowering costs
"Our hedging program continues to stabilize cash flow during this period of lower prices. We are aligning our growth rate more closely with the company's capacity to generate cash flow and, over the next year, we are planning to direct an increasing portion of our investment to grow our oil and NGLs production from several projects on our liquids-rich lands. In all of these efforts, we focus on investing in our highest return projects. We have also been successful in attracting premium joint-venture partners to accelerate the value recognition of our enormous resource potential. We balance capital investment for long-term growth capacity within the reality of near-term market uncertainty currently caused by the supply-demand imbalance in the North American natural gas industry. As always, operational excellence to achieve the lowest cost production and maximize margins is at the forefront of all our efforts to enhance the long-term value of every Encana share," Eresman said.
Third Quarter 2011 Highlights
- Cash flow per share of $1.57, or $1.2 billion
- Operating earnings per share of 23 cents, or $171 million
- Net earnings per share of 16 cents, or $120 million
- Capital investment, excluding acquisitions and divestitures, of $1.2 billion
- Realized natural gas prices of $5.01 per thousand cubic feet (Mcf) and realized liquids prices of $82.43 per barrel (bbl). These prices include realized financial hedges
- At the end of the quarter, debt to capitalization was 34 percent, debt to debt adjusted cash flow was 1.9 times and debt to adjusted EBITDA was 2.1 times
- Paid dividend of 20 cents per share
- Total production of 3.51 Bcfe/d
- Natural gas production of 3.37 Bcf/d
- NGLs and oil production of about 24,400 bbls/d
- Operating and administrative costs of 84 cents per thousand cubic feet equivalent (Mcfe)
- Strategic Developments
- Encana Oil & Gas (USA) Inc., a subsidiary of Encana, agreed to sell a portion of its Piceance natural gas midstream assets in Colorado to a midstream company for approximately $590 million, subject to regulatory approvals and customary closing conditions. The sale is expected to close by the end of December, 2011.
- Encana Oil & Gas (USA) Inc., a subsidiary of Encana, announced it had initiated a process to divest of its North Texas natural gas producing assets in the Fort Worth Basin located in the Barnett Shale play.
- Encana Natural Gas Inc., a subsidiary of Encana, expanded its natural gas transportation infrastructure to market the alternative fuel to vehicles by opening a compressed natural gas (CNG) station in southern Alberta. Similar stations have been opened in Fort Lupton, Colorado, Sierra, British Columbia, Parachute, Colorado, as well as in Red River Parish, Louisiana.
- Divested non-core upstream assets in North America for total proceeds of approximately $55 million and acquired approximately $51 million of upstream assets, for net divestitures of about $4 million.
- Recent Developments
- On October 14, 2011, Encana announced plans that will see NGLs extraction from the Resthaven natural gas processing plant increase from about 1,000 bbls/d to about 12,000 bbls/d. The growth is a result of Encana's agreement with a midstream company, which will invest about C$230 million to expand the processing and liquids extraction capacity at Resthaven in west central Alberta.
- On October 7, 2011, Encana announced that it has reached an agreement to sell its interest in the Cabin Gas Plant in the Horn River Basin of northeast British Columbia to Enbridge Inc. for approximately C$220 million. The sale is subject to regulatory approvals and customary closing conditions and is expected to close in December 2011.
- Canada's National Energy Board recently approved a licence for the Kitimat LNG project, owned 30 percent by Encana, to export the equivalent of 1.4 Bcf/d of natural gas for 20 years from the planned terminal on Canada's West Coast.
- Canada's Encana Smashes Profit Estimates, Shares Rise (Jul 21)
- Encana To Sell Natgas Assets To Caerus Oil For $735MM (Jun 09)
- Encana Boosts Capital Spending By 50% Amid Oil Recovery (Feb 16)