Encana Touts $4.4B in 2010 Cash Flow
Encana achieved strong 2010 operating and financial performance despite another year of low benchmark NYMEX natural gas prices, which averaged about US $4.40 per thousand cubic feet (Mcf) for the year. Encana generated a cash flow of $4.4 billion, or $6.00 per share, supported by solid production growth and commodity price hedges which resulted in realized hedging gains for 2010 of $808 million after tax. Total 2010 production was 3.3 billion cubic feet equivalent per day (Bcfe/d), an increase of 12 per cent per share, on a pro forma basis. Operating earnings for 2010 were $665 million, or 90 cents per share. For the fourth quarter, cash flow was $917 million, or $1.25 per share, operating earnings were $68 million, or 9 cents per share, and production averaged approximately 3.4 Bcfe/d.
Proved reserves additions replaced more than 250 percent of 2010 production
In 2010, Encana added close to 3.1 trillion cubic feet of natural gas equivalent (Tcfe) of proved reserves replacing more than 250 percent of its 2010 production, using forecast prices and costs, after royalties. Total proved reserves increased 12 percent to 14.3 Tcfe.
Strong performance in a year of challenging prices
"Our teams achieved superior performance by efficiently delivering double-digit production and significant reserves growth. We reduced our operating costs and met our cash flow targets. We achieved solid operating and financial results in a challenging operating environment which saw prices hovering at what we believe to be unsustainably low levels. Our 2010 results illustrate our continued focus on risk management, capital discipline and a relentless pursuit of lowering cost structures and maximizing margins," said Randy Eresman, Encana's President & Chief Executive Officer.
"In 2010, we made significant strides in defining our company's resource potential, capturing new play opportunities and high-grading the reserves and resources in our existing portfolio. Many of these new opportunities are in liquids-rich and oil plays. Our extensive portfolio of reserves and economic contingent resources serve as the foundation for our strategic focus on accelerating value recognition by doubling production per share over five years. We are focused on long-term value creation while responding to near-term natural gas market uncertainty through optimizing capital investment, maintaining our financial flexibility and focusing on a disciplined, manufacturing approach to building the underlying productive capacity of our reserves and resource portfolio at the lowest possible cost. In 2011, much of our delineation drilling activity will occur in liquids-rich plays where we have established land positions," Eresman said.
"Although our 2010 investments achieved a very competitive supply cost of about $4 per Mcf, all of our teams are now focused on a goal to lower this supply cost to about $3 per Mcf based on 2010 cost structures, over the next three to five years. We define supply cost as the flat NYMEX natural gas price that yields an internal rate of return of 9 percent after tax, and does not include land costs. Beyond our initiatives to maximize margins by continually lowering our costs, we are encouraged by recent positive market signals and by actions among natural gas consumers and public policy makers who are recognizing the potential for natural gas to play an even greater role in meeting the energy needs of North America," Eresman said.
Low natural gas price environment warrants conservative approach to investment in 2011
Encana is planning a conservative capital program of between $4.6 billion and $4.8 billion for 2011. Production is expected to grow to between 3.475 Bcfe/d and 3.525 Bcfe/d, or 5 percent to 7 percent on a per share basis. Cash flow is expected to be between $4.0 billion and $4.3 billion. The company plans net divestitures of $500 million to $1 billion, of which approximately $300 million is expected to close in the first quarter.
Additional value enhancing opportunities aimed at high-grading portfolio
Encana continues to look for value enhancing opportunities as it high-grades its vast portfolio of resources. In 2010, the company completed the divestiture of non-core assets for total proceeds of $883 million, including $288 million of assets in the Canadian Division and $595 million of assets in the USA Division. In 2010, total acquisitions were $733 million, including $592 million in the Canadian Division and $141 million in the USA Division.
Encana announced in January 2011 that the company had agreed to sell its Fort Lupton natural gas processing plant and gathering systems in Colorado to a subsidiary of Western Gas Partners, LP for approximately $303 million. Encana also recently requested proposals from companies interested in buying and completing the construction of the Cabin Gas Plant, which has regulatory approval for two phases of development for total processing capacity of 800 million cubic feet per day (MMcf/d). The plant will serve producers in the Horn River natural gas resource play in northeast British Columbia.
Encana 2010 Highlights
- Cash flow of $4.4 billion, or $6.00 per share
- Operating earnings of $665 million, or 90 cents per share
- Net earnings of $1.5 billion, or $2.03 per share
- Capital investment, excluding acquisitions and divestitures, of $4.8 billion
- Total realized average price of $5.71 per thousand cubic feet equivalent (Mcfe), realized natural gas prices of $5.48 per Mcf and realized liquids prices of $66.12 per barrel (bbl). These prices include realized financial hedges
- Debt to capitalization at year end was 31 percent and debt to adjusted EBITDA was 1.4 times
- Paid dividends of 80 cents per share
- Purchased approximately 15.4 million shares for cancellation, or approximately 2 percent of shares outstanding
- Total production of 3.3 Bcfe/d
- Natural gas production of 3.2 billion cubic feet per day (Bcf/d)
- NGLs and oil production of about 23,000 barrels per day (bbls/d)
- Operating and administrative costs of $1.07 per Mcfe
- Proved reserves at year end of 14.3 Tcfe
- Added about 3.1 Tcfe of proved reserves, compared to production of 1.2 Tcfe, for a production replacement of more than 250 percent
- Outlined a strategy to accelerate value recognition of Encana's vast inventory of natural gas resources. This resulted in the company setting a goal to double production per share over five years
- Updated an independent evaluation of Encana's reserves and economic contingent resources, confirming an enormous inventory of natural gas that is more than sufficient to support growth objectives
- Further optimized horizontal drilling and fracturing programs in the Horn River Basin, Montney and Haynesville formations, using Encana's industry-leading, low-cost manufacturing approach
- Announced a significant land position on the Collingwood shale play in Michigan
- Continued to attract third-party capital from several companies and entities. Third-party capital commitments directed to Encana's benefit in 2011 of $382 million
- Initiated discussions with China National Petroleum Corporation (CNPC), parent of PetroChina, outlining the framework for a potential joint-venture investment in the development of certain lands in British Columbia
- Divested non-core assets in North America for approximately $883 million and acquired about $733 million of assets, for net divestitures of about $150 million
- Increased exposure to oil and NGLs by maximizing recovery through plant expansions and executing new processing agreements
- Executed a drilling and completions program to prepare for production from the Deep Panuke natural gas field expected in late 2011. Total capital costs for the Deep Panuke project are expected to be approximately $960 million
- Commenced construction on five natural gas fueling stations, deployed nine natural gas powered drilling rigs and continued the company's conversion program of fleet vehicles to natural gas, all part of a commitment to support increased use of cleaner-burning natural gas.
- Encana Calls End to Permian Race as Focus Turns to Output (Oct 18)
- Canada's Encana Smashes Profit Estimates, Shares Rise (Jul 21)
- Encana To Sell Natgas Assets To Caerus Oil For $735MM (Jun 09)