Encana delivered strong financial and operating results in the first quarter of 2010, despite a weakening in North American natural gas prices. Cash flow was $1.2 billion, or $1.57 per share and operating earnings were $418 million, or $0.56 per share. Encana's favorable commodity price hedges contributed $125 million in realized after-tax gains, or $0.17 per share, to cash flow. First quarter total production was approximately 3.3 billion cubic feet equivalent per day (Bcfe/d).
"Encana's solid first quarter financial and operating performance reflects the strength of our vast North American inventory of low-cost resource plays. With production averaging about 3.3 Bcfe/d in the first quarter, we are on track to meet our 2010 guidance, and in line with our long-term goal of doubling production per share in five years. Our focus remains firmly on being among the lowest-cost producers in industry, continually pursuing capital discipline and managing risks with commodity price hedges and increasing operational efficiencies as we strive to maximize margins for all our natural gas production," said Randy Eresman, President & Chief Executive Officer.
Best long-term investment opportunity is accelerated pace of development
At the company's March 16, 2010 Investor Day, Encana published the results of a comprehensive and independent assessment of its natural gas resources. Covering 12.7 million net acres, the company's North American natural gas portfolio holds an estimated 12.8 trillion cubic feet equivalent (Tcfe) of proved reserves plus another 16 Tcfe of low estimate economic contingent resources, using forecast prices. Given this immense inventory of natural gas resources, the company believes that the best value creation opportunity for shareholders is to accelerate development with a long-term goal to double production per share over the next five years.
Focus on value creation remains paramount
"Our strategy is focused on high-growth, low-cost, margin maximization, while continuing our tradition of maintaining the company's financial strength, applying strict discipline to all capital investment and continually capturing operational efficiencies as we grow production on a per share basis. By accelerating our development pace, we are advancing value recognition of our huge natural gas resource inventory. At the same time, we are ever mindful that during periods when low prices occur, we may need to act to preserve the value of our assets, which could include production curtailments not unlike those we employed for a period in 2009," Eresman said.
"We believe the current natural gas price environment is unsustainably low given what it costs to balance a normal market. Therefore, we plan to invest based on what we belive to be a more sustainable long-term price. Over the long term, we are confident that we can profitably grow production as we work to capture market share from higher-cost producers," Eresman said.
Gas factories to optimize development efficiencies
"With the enormous natural gas resource inventory we have built over the past several years, we are now in the early stages of bringing together years of technical breakthroughs, advanced manufacturing practices and operational expertise through the gas factory development approach on our key resource plays. Still early in their development, gas factories accelerate development, optimize efficiencies and lower environmental impact by enabling the drilling of scores of horizontal wells, each containing multiple hydraulic fractures from a single pad location. As a leader in this low-cost manufacturing approach to natural gas development, Encana is extremely well positioned to produce increasing quantities of low-cost natural gas, enhancing the value of every Encana share," Eresman said.
Share purchases maintain per share growth
Encana plans to achieve per share growth through double-digit organic production increases and by using proceeds from divestitures of producing assets to purchase shares to offset decreased per share production as a result of the sale of those assets. In the first quarter of 2010, Encana purchased for cancellation approximately 9.9 million common shares at an average share price of $32.36 under the company's Normal Course Issuer Bid for a total cost of approximately $320 million. At March 31, 2010, Encana had approximately 741.7 million shares outstanding. In 2010, Encana expects to divest of approximately $500 million of non-core assets and make approximately the same amount of share purchases.
First Quarter 2010 Highlights
Majority of net earnings year-over-year increase related to unrealized mark-to-market accounting gains
Risk management positions at March 31, 2010 are presented in Note 14 to the unaudited Interim Consolidated Financial Statements. In the first quarter, Encana’s commodity price risk management measures resulted in realized gains of approximately $125 million after tax.
About 60 percent of 2010 natural gas production hedged
Quarterly dividend of 20 cents per share declared
Encana corporate guidance
Encana's corporate guidance is unchanged from the most recent update published March 16, 2010.
Encana signs farm-out agreements to develop British Columbia natural gas assets
Normal Course Issuer Bid
In the first quarter of 2010, Encana purchased for cancellation approximately 9.9 million common shares at an average share price of $32.36 under the company's Normal Course Issuer Bid for a total cost of approximately $320 million.
Encana has a strong balance sheet, with 100 percent of its outstanding debt composed of long-term, fixed-rate debt with an average remaining term of 13 years. The company has upcoming debt maturities of $200 million in 2010 and $500 million in 2011. At March 31, 2010, Encana had $5.0 billion in unused committed credit facilities. With Encana's bank facilities undrawn and $2.0 billion of cash and cash equivalents on the balance sheet at the end of the quarter, the company’s liquidity position is extremely strong. Encana is focused on maintaining investment grade credit ratings, capital discipline and financial flexibility. Encana targets a debt to capitalization ratio of less than 40 percent and a debt to adjusted EBITDA ratio of less than 2.0 times. At March 31, 2010, the company's debt to capitalization ratio was 30 percent and debt to adjusted EBITDA was 1.6 times, on a trailing 12-month basis, using 2009 pro forma results.
In the first quarter of 2010, Encana invested $1.0 billion in capital, excluding acquisitions and divestitures, with a focus on continued development of the company’s key resource plays. Encana invested about $28 million in acquisitions in the first quarter and divested about $146 million of non-core properties.
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