EnCana reports in U.S. dollars and according to U.S. protocols in order to facilitate a more direct comparison to other North American upstream oil and natural gas exploration and development companies. Reserves and production are reported on an after-royalty basis. All figures are in U.S. dollars unless otherwise noted.
"EnCana achieved strong financial and operating performance in the second quarter, driven principally by expanded natural gas resource plays and higher crude oil production. We are on track to deliver 15 percent production growth in 2004, 80 percent of which is organic. On a per share basis, that is year- over-year production growth of about 20 percent. Looking longer term, we believe our existing asset base is capable of delivering at least 10 percent annual growth per share through the next five years," said Gwyn Morgan, EnCana's President & Chief Executive Officer.
Second quarter operating earnings reach $379 million, up 38 percent EnCana's second quarter operating earnings of $379 million were up 38 percent compared to the same period in 2003. Operating earnings exclude an after-tax unrealized mark-to-market loss of $104 million related to price hedges and an after-tax unrealized $25 million loss due to changes in foreign exchange on translation of U.S. dollar denominated debt issued in Canada. After inclusion of these non-cash items, net earnings in the second quarter were $250 million, or 54 cents per share diluted. Second quarter pre-tax cash flow was $1,334 million, up 40 percent from 2003. Second quarter after-tax cash flow of $1,131 million includes a cash tax provision of $203 million, compared with a $54 million cash tax recovery in 2003. This is consistent with the company's earlier statements that the merger transaction resulted in a significant cash tax deferral from 2003 to 2004. Second quarter revenues net of royalties were $2,718 million.
Second quarter gas production up 23 percent in past year; oil and NGLs sales up 31 percent
EnCana's second quarter natural gas production was 3.04 billion cubic feet per day, up 23 percent from the second quarter of 2003. The increase is mainly driven by strong growth from Greater Sierra, Cutbank Ridge and Southern Plains shallow gas in Canada and Mamm Creek in the U.S. Rockies. Gas sales include production as of May 19th from the Tom Brown acquisition, which added an average of 132 million cubic feet per day over the quarter. Oil and NGLs sales grew 31 percent to 270,000 barrels per day driven largely by growth from Canadian oilsands, Ecuador and the U.K. Operating costs were $3.29 per BOE, down 7 percent from the first quarter, and in line with the full year 2004 operating cost forecast of between $3.30 and $3.50 per BOE. EnCana drilled 1,065 net wells in the second quarter. Core capital investment, excluding acquisitions and divestitures, was approximately $1.2 billion.
Second quarter oil and gas price realizations, excluding hedging impact EnCana's second quarter realized pre-hedging North American natural gas prices were up about 9 percent from the second quarter of 2003 to $5.34 per thousand cubic feet. Realized pre-hedging oil and NGLs prices were up about 22 percent from the second quarter of 2003 to $28.00 per barrel. Canadian heavy oil price differentials widened to average $11.02 per barrel compared to $6.55 per barrel one year earlier. Ecuadorian NAPO blend, shipped on the new OCP Pipeline, also experienced a wider price differential from WTI in the second quarter of 2004, averaging $12.17 per barrel, compared to $8.06 per barrel at year-end 2003. OCP began full operations in the fourth quarter of 2003.
Production growth on track
EnCana is on track to achieve its 2004 sales guidance of between 725,000 and 765,000 BOE per day, which at the midpoint is a 15 percent increase from 2003 sales volumes. Projected sales are comprised of between 2.95 billion and 3.05 billion cubic feet of natural gas per day and between 235,000 and 255,000 barrels of oil and NGLs per day. Upstream core capital is expected to be in the range of $4,550 million and $4,850 million for 2004.
Cash flow exceeds $2 billion in first six months, sales up 20 percent
EnCana's first half 2004 cash flow, before tax, was $2,561 million, up 17 percent from the same 2003 period. After-tax, EnCana generated $2,126 million of first half cash flow, or $4.55 per share diluted. This includes a first half cash tax provision of $435 million, compared with a cash tax recovery of $34 million in the first half of 2003. EnCana's first half daily sales averaged 746,500 BOE, up 20 percent from the first half of 2003. Daily sales were comprised of 2.9 billion cubic feet of gas and 267,000 barrels of oil and NGLs. In the first six months, EnCana drilled 2,684 net wells, about half of the 5,500 net wells planned for 2004.
First half operating earnings were $844 million, up 8 percent
First half 2004 operating earnings were $844 million, or $1.81 per share diluted, up about 8 percent from the first half of 2003. Net earnings in the first six months were $540 million, or $1.16 per share diluted, which includes three non-cash items: an after-tax unrealized mark-to-market loss of $356 million, an after-tax unrealized loss on foreign exchange on US$ denominated debt issued in Canada of $57 million, and a $109 million gain due to tax rate changes. First half 2004 revenues net of royalties were $5,568 million.
Earnings impacted by change in accounting policy for unrealized hedging Losses
On January 1, 2004, EnCana was required to adopt the new accounting standard governing oil and gas price hedging activities. EnCana expects that this new standard will continue to result in greater volatility in its reported net earnings. A complete discussion of the impact of this new accounting standard is contained in Notes 2 and 14 of the unaudited second quarter consolidated financial statements.
Resource play focus advanced with Tom Brown acquisition and conventional asset sales
In recent months, EnCana has advanced its strategic focus on natural gas resource growth plays. These plays are characterized by long-life, low-decline production performance. With the acquisition of Tom Brown, Inc. in May, EnCana initiated a two-step process that will see its proportion of anticipated production from North American resource plays increase from 60 to approximately 75 percent during 2004. In the first step, the company acquired Tom Brown, a Denver-based, resource-play focused, gas exploration and production company. Tom Brown's assets are an excellent fit with EnCana's leading position in the Piceance Basin of the U.S. Rockies. The second step will see the divestiture of between 40,000 and 60,000 BOE per day of conventional oil and gas production. Since announcing the offer for Tom Brown in April, EnCana has reached agreements on the divestiture of about 28,000 BOE of daily production, the sale of Sauer Drilling Company of Casper, Wyoming and the divestiture of two undeveloped oilsands leases in northeast Alberta for total proceeds of about $940 million. EnCana expects to conclude these transactions by early September. Additional asset packages have been identified for divestiture in the near term. To date in 2004, EnCana has divested of, or agreed to divest of, conventional, non-core properties producing about 50,000 barrels of oil equivalent per day for total proceeds of approximately $1.35 billion.
"North American conventional reservoirs are generally experiencing increasing decline rates and decreasing reserve life - the combination of which creates a treadmill effect that makes profitable production growth difficult. EnCana's strategy of investing in unconventional North American resource plays, while divesting of conventional assets, is expected to continually slow our treadmill and enable us to focus on strong return investments in long-life, low-decline assets. Based on reserve reports prepared by independent qualified reserve evaluators at year-end 2003, the decline rate of all of EnCana's proved developed reserve base was about 20 percent, which is expected to fall to less than 15 percent over the next several years. Year-end 2004 booked reserves will reflect the acquisition of Tom Brown and the divestiture of conventional reserves, further improving this go forward picture," Morgan said.
Unbooked Resource Potential underpins EnCana's long-term, resource play growth plan
Exploitation-style drilling activities and shallowing production decline profiles are characteristics of resource plays. Hence, as more and more of EnCana's production comes from the company's inventory of resource plays, the reliability and predictability of the company's resource and production growth forecasts continues to increase.
"Currently, about 17,000 long-life, shallow-decline, North American natural gas resource play wells serve as the backbone of our production, and their number continues to grow," Morgan said.
Reported proved reserves at year-end 2003 were about 2.4 billion BOE, yielding a reserve life index of about 8.5 years based on current production rates, which excludes proved reserves that have since been added via ongoing field activities and the Tom Brown acquisition. Beyond that, EnCana estimates that 3.5 billion BOE of Unbooked Resource Potential may be added to proved reserves over the next five years. This Unbooked Resource Potential is largely associated with our resource plays and therefore EnCana's investments are mainly focused on low-risk exploitation rather than high risk exploration.
EnCana estimates this Unbooked Resource Potential to be about 16 trillion cubic feet of natural gas and about 850 million barrels of oil and natural gas, up approximately 60 percent over the past year due mainly to the addition of the Cutbank Ridge resource play in British Columbia and the Tom Brown acquisition. This means that, after production, proved reserves on existing company lands are expected to increase about 75 percent over the next five years. EnCana also has substantial conventional exploration potential on its 20 million net acres of undeveloped North American land that is not included in its assessment of its Unbooked Resource Potential.
"It is the repeatable nature of the low-risk exploitation of both our proved reserves and Unbooked Resource Potential that enables us to confidently say that we expect our future production growth to average an annual rate of at least 10 percent per share. In fact, we are projecting our gas production will grow by 35 percent over the two-year period 2003 to 2005. This projected resource play growth stands in stark contrast to weakening industry-wide, conventional natural gas and oil production in North America," Morgan said.
Risk management strategy
EnCana's market risk mitigation strategy is designed to deliver greater predictability of cash flow and returns on investment. Approximately half of the company's projected 2004 gas sales, after royalties, is hedged at an average effective NYMEX price of about $5.36 per thousand cubic feet. In addition, the company has entered into longer term basis and pricing hedges specifically for the purpose of protecting against high U.S. Rockies gas price basis differentials. About half of EnCana's projected 2004 oil sales are hedged with swaps or costless collars between $20 and $26 per barrel of WTI. Detailed risk management positions at June 30, 2004 are presented in Note 14 to the unaudited second quarter consolidated financial statements for the financial contracts and in Management's Discussion and Analysis for the physical contracts. In the second quarter, EnCana's financial commodity and currency risk management measures resulted in gross revenue being lower by approximately $234 million, comprised of $164 million on oil sales and $70 million on gas sales.
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