EnCana has extended its risk management program for 2010 by establishing fixed price hedges on about 35 percent of the company's expected natural gas production -- about 1.39 billion cubic feet per day -- at an average price of US $6.21 per thousand cubic feet (Mcf) for the 2010 gas year, which runs from November 1, 2009 to October 31, 2010.
"Our gas price hedging program has served us well in the first five months of 2009, generating close to $2 billion in cash flow above what market prices would have delivered. This strong cash flow has underpinned our 2009 capital investment during the global economic downturn. Our hedging program increases certainty in cash flow and helps ensure that we meet our capital investment and dividend requirements. It also brings greater certainty to the economics of our projects. At an average price of $6 per Mcf, EnCana expects to earn an after-tax rate of return on gas projects in excess of 20 percent," said Randy Eresman, EnCana's President & Chief Executive Officer.
Natural gas prices remain weak
"North American natural gas markets remain oversupplied due to two factors, the emergence of large new supplies from unconventional plays followed by a major economic downturn in the past year that has cut demand. These events have driven prices to levels well below what it costs to add new supplies -- levels that we believe are unsustainable. In recent months, drilling has slowed and over time we expect that production will decline, bringing the market back into balance. However, it is difficult to predict when that will occur and what price will emerge," Eresman said.
About two thirds of current gas production hedged above $9 per Mcf
EnCana's financial position is strong and the company's debt ratios remain below our targeted ranges. EnCana has hedged about two-thirds of expected natural gas production, about 2.6 billion cubic feet per day, through October of this year at an average NYMEX equivalent price of $9.13 per thousand cubic feet (Mcf), which is more than two times the current spot price. EnCana continually assesses its hedging needs and the opportunities available prior to establishing its capital program for the upcoming year.
Multi-dimensional risk management
EnCana's hedging program is just one component of the company's multi-dimensional approach to risk management. At the heart of the company's risk management program is its diversified and extensive portfolio of North American resource plays across many of the continent's top hydrocarbon basins. The diversity of this portfolio allows EnCana to allocate or redistribute capital among projects if local factors arise that influence returns on individual key resource plays. Secondly, EnCana's manufacturing approach to resource play development is focused on capital efficiency and on being one of the lowest cost producers in all key resource plays, an approach that helps the company deliver strong relative returns in a wide range of economic scenarios. As well, EnCana is focused on generating significant free cash flow at all times during the economic cycle, particularly during periods such as the current economic downturn. The company's operational and financial success reinforces the sustainable nature of EnCana's resource play business model.
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