Encana Touts $1.2B First-Quarter Earnings

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


  • Cash flow of $1.2 billion, or $1.57 per share
  • Operating earnings of $418 million, or $0.56 per share
  • Net earnings of $1.5 billion, or $1.97 per share, primarily due to after-tax unrealized mark-to-market hedging gains of $912 million
  • Capital investment, excluding acquisitions and divestitures, of $1.0 billion
  • Free cash flow of $153 million (Free cash flow is defined in Note 1 on page 6)
  • Realized natural gas prices of $6.14 per thousand cubic feet (Mcf) and realized liquids prices of $67.07 per barrel (bbl). These prices include realized financial hedges
  • At the end of the quarter, debt to capitalization was 30 percent and debt to adjusted EBITDA was 1.6 times
  • Paid dividend of 20 cents per share


  • Total production was 3.3 Bcfe/d
  • Natural gas production was 3.1 Bcf/d
  • Natural gas liquids (NGLs) and oil production of about 24,000 barrels per day (bbls/d)
  • Operating and administrative costs of $1.02 per thousand cubic feet equivalent (Mcfe)

Strategic developments

  • Announced goal to double production per share in the next five years
  • Disclosed independent evaluation of company’s probable and possible reserves and economic contingent resources to support new strategy
  • Entered into farm-out agreement with Kogas Canada Ltd. (KOGAS), which will invest up to C$565 million over three years towards earning a 50 percent interest in about 154,000 acres of land in the Horn River shale play and Montney formation in the Greater Sierra and Cutbank Ridge key resource plays
  • Divested non-core natural gas and oil assets in North America for approximately $146 million.

Majority of net earnings year-over-year increase related to unrealized mark-to-market accounting gains
Operating earnings include the realized hedging gains and losses which reflect the actual value of the hedging contracts when settled, but exclude unrealized mark-to-market accounting gains and losses. Management believes operating earnings are a better measure of performance because they remove the variability associated with the unrealized mark-to-market accruals. Net earnings include both realized hedging gains/losses and unrealized mark-to-market accounting gains/losses. Net earnings in the first quarter were affected by the combined impact of realized and unrealized hedging gains/losses, resulting in an after-tax gain of $1.0 billion, compared to a $579 million after-tax gain in the first quarter of 2009, on a pro forma basis.

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
Encana has hedged approximately 2 Bcf/d of expected 2010 natural gas production at an average NYMEX price of $6.01 per Mcf as of March 31, 2010. In addition, Encana has hedged approximately 935 million cubic feet per day (MMcf/d) of expected 2011 natural gas production at an average price of about $6.52 per Mcf and approximately 1.0 Bcf/d of expected 2012 natural gas production at an average price of $6.46 per Mcf. This price hedging strategy helps increase certainty in cash flow to assist Encana to meet its anticipated capital requirements and projected dividends. Encana continually assesses its hedging needs and the opportunities available prior to establishing its capital program for the upcoming year.

Corporate developments

Quarterly dividend of 20 cents per share declared
Encana’s Board of Directors has declared a quarterly dividend of 20 cents per share payable on June 30, 2010 to common shareholders of record as of June 15, 2010. Based on the April 20, 2010 closing share price on the New York Stock Exchange of $31.75, this represents an annualized yield of about 2.5 percent.

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
On February 26, 2010 Encana entered into farm-out agreements with KOGAS, which will invest about C$564 million over three years to earn a 50 percent interest in about 154,000 acres of land in the Horn River shale play and Montney formation in the Greater Sierra and Cutbank Ridge key resource plays. The arrangement is defined by two distinct farm-out agreements for each block of land in northeast B.C. The exploration investment is planned for three, one-year phases on each of the contiguous blocks, with investment commitments from KOGAS of approximately C$144 million in year one, C$196 million in year two and C$224 million in year three. Prior to the start of the second and third phases, under each farm-out agreement, KOGAS has the option to terminate the agreement which would result in KOGAS forfeiting its right to earn any interest in those lands.

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.

Financial strength

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.