EnCana Profits Slip, But Still Strong; Production Increases
EnCana continued to deliver strong financial and operating performance in the first quarter of 2009. Cash flow was US$1.9 billion, or $2.59 per share and operating earnings were $948 million, or $1.26 per share - down 18 and 9 percent respectively on a per share basis compared to the first quarter of 2008. These results are on track with 2009 guidance and were achieved during a quarter when benchmark natural gas prices fell about 39 percent and oil prices were down about 56 percent compared to the same period in 2008. First quarter natural gas and oil production increased 3 percent compared to the same period in 2008 to 4.7 billion cubic feet equivalent per day (Bcfe/d). In addition, this production level is higher than EnCana's first quarter production expectations largely due to the impact of price-sensitive royalty rates in Alberta, which are reduced at lower prices and increased at higher prices. EnCana reports production on an after-royalties basis. Before any price-related royalty impacts, EnCana expects 2009 production to be at levels similar to the volumes produced in 2008.
"Operational excellence in our portfolio of low-cost, low-risk resource plays helped EnCana achieve cost-effective production across North America. Underpinning our strong financial performance was close to $700 million in realized after-tax gains from our natural gas hedges during the first quarter," said Randy Eresman, EnCana's President & Chief Executive Officer.
Modest capital program aligned to economic conditions
"With continued economic uncertainty and low prices, particularly for natural gas, we remain focused on directing our capital investment to only our highest return projects. For 2009, we set a modest capital program with the flexibility to align investments with the industry conditions. Our North American resource play business model and our conservative investment approach will help EnCana generate strong performance through 2009 and withstand the prevailing economic downturn.
"EnCana's financial position is strong. Our debt ratios remain below our targeted range and we have hedged about two-thirds of our total expected natural gas production through October of this year at an average price of $9.13 per thousand cubic feet (Mcf), which is about two and a half times the current spot price. Our hedging strategy is aimed at providing an increased level of certainty to our cash flows so that we can efficiently manage our capital programs," Eresman said.
Industry costs starting to drop
"In the first quarter, operating and administrative costs decreased about 31 percent compared with the same period the year before, to $1.06 per thousand cubic feet of gas equivalent (Mcfe), due primarily to a weaker Canadian dollar, lower fuel prices and lower long-term incentive costs. Substantially reduced field activity across North America is starting to result in lower supply and services pricing and, by the end of 2009, we anticipate price reductions could reach more than 20 percent from 2008 average costs, if current trends continue. So far in 2009, we're tracking lower on capital investment and operating and administrative costs, and by mid-year we expect to know how much this will impact our overall expenditures for 2009," Eresman said.
EnCana's net earnings in the first quarter were $962 million, an increase of $869 million from the first quarter of 2008. First quarter 2009 net earnings included $89 million of after-tax unrealized gains due to mark-to- market accounting for hedging contracts compared to an after-tax loss of $737 million in the first quarter of 2008, a swing of $826 million in net earnings. It is because of these dramatic mark-to-market accounting swings in net earnings that EnCana focuses on operating earnings as a better measure of quarter-over-quarter earnings performance.
Realized after-tax hedging gains for the first five months of the 2008- 2009 natural gas year, which runs from November 1, 2008 to October 31, 2009, were $1.0 billion, and unrealized after-tax gains for the remainder of the gas year are currently forecast to be $1.9 billion, for a total of $2.9 billion, after-tax.
Total production from key resource plays was 3.7 Bcfe/d compared to 3.4 Bcfe/d in the first quarter of 2008. This was led by a 50 percent production increase in the East Texas key resource play due to ongoing success at the Deep Bossier play. EnCana continued to drill prolific wells in the Amoruso field, where 30-day initial production rates averaged more than 19 MMcf/d. The Charlene # 1 well was completed in January and flowed during initial evaluation in excess of 50 MMcf/d.
EnCana encouraged by resource potential in Haynesville shale play
"While it is early days in the development of the Haynesville play in Louisiana and Texas, there have been some very encouraging results from our program as well as from other producers in the region," said Jeff Wojahn, EnCana's Executive Vice-President and President, USA Division. "Given the significant potential of our lands, we plan to re-allocate $290 million of savings from other areas of the company into our Haynesville program this year. With a total capital program of $580 million we will be drilling about 50 net wells which will enable us to continue to increase our understanding of the play, further evaluate our lands, and retain prospective acreage." In anticipation of increased future production from the region and to facilitate unrestrained market access for the company's expected production growth, EnCana is advancing plans for midstream processing and gas transportation. This includes recent commitments of 150 million cubic feet per day of capacity on the proposed Gulf South pipeline expansion and 500 million cubic feet per day of service on the proposed ETC Tiger pipeline.
Development continues in promising Horn River shale play
EnCana remains optimistic about the production potential from its land holdings in the Horn River shale play in northeast British Columbia. The company has adopted a more efficient way to develop the natural gas in this play by increasing the number of fracture stimulations per long-reach horizontal well leg. EnCana and its partner Apache now expect to increase their fracs per leg to as many as 14 from the originally-planned eight fracs. This could reduce the number of wells required to recover the resource because more of the natural gas can be accessed from each well. The revised plan is to drill 12 net wells this year, rather than the 20 initially scheduled. Public consultations are underway for the proposed Cabin Gas Plant, to be built about 60 kilometres northeast of Fort Nelson, British Columbia. The proposed plant, in which EnCana holds a 25 percent interest, is expected to have an initial processing capacity of 400 MMcf/d. Processing capacity is expected to expand in stages in conjunction with production growth from the Horn River Basin. The first phase of the project is expected to be commissioned in the third quarter of 2011. EnCana plans to construct the plant on behalf of industry co-owners who are major land holders in the Horn River Basin.
Foster Creek and Christina Lake expansions increase capacity
The commissioning of recent expansions at Foster Creek, which are expected to increase plant capacity to 60,000 bbls/d net to EnCana, is nearly complete and production is ramping up. First quarter production of approximately 28,000 bbls/d is targeted to increase to more than 45,000 bbls/d by year-end. At Christina Lake, first quarter production was more than 6,500 bbls/d - a 152 percent increase over the first quarter of 2008 as a result of an expansion that was completed in mid-2008. Construction continues on the next phase of expansion at Christina Lake, which is targeted to increase net plant capacity to 29,000 bbls/d in 2011.
Risk management positions at March 31, 2009 are presented in Note 16 to the unaudited Interim Consolidated Financial Statements. In the first quarter of 2009, EnCana's commodity price risk management measures resulted in realized gains of approximately $699 million after-tax, composed of a $693 million after-tax gain on gas price and basis hedges and a $6 million after-tax gain on other hedges.
Two-thirds of expected 2009 gas production hedged during first 10 months of 2009
EnCana has hedged about 2.6 Bcf/d of expected gas production through October 2009 at an average NYMEX equivalent price of $9.13 per Mcf. This price hedging strategy increases certainty in cash flow to help ensure that EnCana can meet its capital and dividend requirements without substantially adding to debt. EnCana continually assesses its hedging needs and the opportunities available prior to establishing its capital program for the upcoming year.
Quarterly dividend of 40 cents per share declared
EnCana's Board of Directors has declared a quarterly dividend of 40 cents per share payable on June 30, 2009 to common shareholders of record as of June 15, 2009. Based on the April 21, 2009 closing share price on the New York Stock Exchange of $42.94, this represents an annualized yield of about 3.7 percent.
EnCana's corporate guidance is unchanged from the most recent update published February 12, 2009.
EnCana has a very strong balance sheet, with 78 percent of EnCana's outstanding debt comprised of long-term, fixed-rate debt with an average remaining term of more than 14 years. Upcoming debt maturities in 2009 are $250 million and $200 million in 2010. At March 31, 2009, EnCana had $2.0 billion in unused committed credit facilities. EnCana targets a debt to capitalization ratio between 30 and 40 percent and a debt to adjusted EBITDA ratio of 1.0 to 2.0 times. At March 31, 2009, the company's debt to capitalization ratio was 29 percent and debt to adjusted EBITDA, on a trailing 12-month basis, was 0.7 times.
In the first quarter of 2009, EnCana invested $1.5 billion in capital, excluding acquisitions and divestitures, with a focus on continued development of the company's key resource plays and expansion of downstream heavy crude oil refining capacity.
EnCana invested about $79 million in land acquisitions in the first quarter and divested about $33 million of mature properties in Western Canada. Depending on market conditions for the rest of this year, EnCana may divest between $500 million and $1 billion of assets.
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