EnCana achieved solid increases in 2008 cash flow and operating earnings as a result of strong growth in natural gas and oil production and higher prices. Financial results were enhanced in the fourth quarter by EnCana's favorable natural gas price hedges. Again in 2008, EnCana achieved strong year-over-year proved reserves additions.
"Despite the unprecedented volatility in oil and natural gas prices and a challenging operating environment in 2008, EnCana delivered strong operational and financial performance. We met or exceeded all of our targets, including those for cash flow, production and capital investment. Overall production grew 6 percent, driven by our key resource plays which increased 13 percent year-over-year. We added reserves of 2.5 trillion cubic feet of gas equivalent, replacing 150 percent of production at a very competitive finding and development cost of US$2.50 per thousand cubic feet of gas equivalent," said Randy Eresman, EnCana's President & Chief Executive Officer.
"EnCana is pursuing a conservative and prudent capital program in 2009 and we have built flexibility into our plans to adjust investment depending on how the year unfolds. With widespread economic uncertainty, we remain intently focused on our core business objectives: maintaining financial strength, generating significant free cash flow, further optimizing our capital investments and continuing to pay a stable dividend to shareholders - currently $1.60 per share annualized, which at the current share price results in a yield of about 3.7 percent.
"Natural gas and oil prices are expected to remain low at least through the first quarter of 2009. While we have seen some indication of a softening in service and supply costs, reductions are likely to be more pronounced in the latter half of 2009. We are affirming our 2009 corporate guidance. Our cash flow forecast for the year is underpinned by strong hedges - about two- thirds of expected natural gas production hedged through October 2009 at an average price of $9.13 per thousand cubic feet, well above the current spot price. In addition, we are continually seeking new ways to strengthen our financial position, including cost-reduction initiatives, project reviews throughout the year and exploring and implementing operational efficiencies across our company.
"EnCana's low-risk, low-cost resource play business model provides financial resilience and positions the company very well for dealing with the economic downturn. We can apply an even higher level of scrutiny and fine tune investments in order to target optimal project returns and long-term value creation," Eresman said.
2008 Net Earnings
EnCana's net earnings in 2008 increased more than 50 percent to $5.9 billion. Net earnings in 2008 included a $1.8 billion after-tax unrealized gain, whereas net earnings in 2007 included an $811 million after-tax unrealized loss, both due to mark-to-market accounting for hedging contracts. The large unrealized gain in 2008 resulted from a decrease in commodity prices during the second half of the year. The gain essentially reversed unrealized mark-to-market losses recognized earlier in the year when natural gas prices were rising. It is because of these dramatic mark-to-market accounting swings in net earnings that EnCana focuses on operating earnings, which excludes the unrealized mark-to-market accounting gains and losses, as a better measure of earnings performance. Operating earnings in 2008 were up 7 percent compared to 2007, reflecting stronger prices in 2008 and EnCana's 6 percent increase in daily production.
EnCana's Integrated Oil Division, which includes the company's integrated oil business venture with ConocoPhillips and production from Athabasca and Senlac, generated $375 million in operating cash flow, down 75 percent, from 2007. EnCana saw strong financial performance from its Foster Creek and Christina Lake operations, which benefited from higher heavy oil prices, up about 60 percent, and a 13 percent increase in production to 30,183 bbls/d. Operating cash flow for Foster Creek and Christina Lake nearly doubled to $421 million in 2008 compared to $213 million in 2007. The downstream operations reported a loss of $241 million in operating cash flow, a $1.3 billion decrease compared to 2007, a year with record crack spreads. Downstream operating cash flow was reduced as a result of lower refining margins and higher purchased product costs during the second half of 2008. The Wood River and Borger refineries are located in markets influenced by U.S. Mid-Continent and Chicago 3-2-1 crack spreads. In 2008 the Chicago 3-2-1 crack spread decreased 37 percent to $11.22 per bbl compared to $17.67 per bbl in 2007. The weaker refining margins were offset, somewhat, by the higher upstream pricing, which demonstrates the benefit of the company's integration strategy.
At Foster Creek steaming of Phase 1D and 1E has started and construction is nearing completion. A ramp up of production is expected to begin at the end of the first quarter in 2009. Capital costs for the expansions remain on budget. At Christina Lake construction of the Phase 1C expansion also remains on schedule and on budget.
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