Encana Reports $1.2B in 2Q, Boosts Capex to $5B

Encana delivered strong operating performance and solid financial results in the second quarter of 2010. Cash flow was $1.2 billion, or $1.65 per share, and operating earnings were $81 million, or 11 cents per share. Encana's favorable commodity price hedges contributed $263 million in realized after-tax gains, or 36 cents per share, to cash flow. Total production in the second quarter was approximately 3.3 billion cubic feet of gas equivalent per day (Bcfe/d). Second quarter natural gas production per share increased 12 percent compared to the second quarter of 2009 on a pro forma basis.

Strong operating performance boosts 2010 production forecast, capital investment increased by $500 million

Encana continued to deliver strong operating performance in the second quarter, with current daily production already higher than the company’s full-year 2010 average daily production guidance. Given the strong performance of key resource plays this year, Encana has increased its 2010 production guidance by 65 million cubic feet of gas equivalent per day (MMcfe/d) to 3.365 Bcfe/d. To accelerate long-term growth projects and build productive capacity of the company's vast North American natural gas portfolio for 2011, Encana is increasing capital investment by $500 million to approximately $5 billion in 2010.

Optimization through gas factories holds additional promise for cost improvement, 2010 operating costs trimmed "Our production is ahead of target and we are gaining ground on costs through continual optimization programs that help us pursue our cornerstone goal of being the industry's lowest-cost producer. To date, 2010 operating costs are tracking about 17 percent below guidance and as a result we have lowered our operating cost guidance by 10 cents to 80 cents per thousand cubic feet of gas equivalent. As we look ahead, we expect to see substantial additional cost savings through expanded use of multi-well gas factories and as we continue to extend the reach of our horizontal wells," said Randy Eresman, Encana's President & Chief Executive Officer.

Haynesville joins key resource plays; Encana captures Michigan shale lands, pursues joint venture with CNPC In recognition of its very strong production growth and huge resource potential, Encana's Haynesville shale play has been added to the company's list of key resource plays. During the second quarter, Encana also expanded its shale portfolio capturing a significant land position in Michigan's Collingwood shale play and the company is progressing joint-venture negotiations with China National Petroleum Corporation (CNPC), an initiative that holds significant promise for sizable investment in Canada that would help accelerate growth from the company's enormous natural gas resource base.

First half financial performance strong

In the first half of 2010, Encana generated cash flow of $2.4 billion, or $3.22 per share, and operating earnings of $499 million, or 67 cents per share. Net earnings were $972 million, or $1.31 per share.

Second quarter net earnings impacted by unrealized foreign exchange and hedging

Second quarter net earnings, a $505 million loss, illustrate how net earnings can be impacted by unrealized hedging gains or losses and unrealized foreign exchange gains or losses on long-term debt. Second quarter net earnings include unrealized after-tax losses on commodity hedging and non-operating foreign exchange of $340 million and $246 million, respectively. Encana's first quarter 2010 net earnings were $1.48 billion, nearly $2 billion higher than the second quarter. The decrease in quarter-over-quarter earnings was largely driven by a change in unrealized hedging; in the first quarter of 2010, Encana recorded an after-tax gain of $912 million compared to a $340 million after-tax loss in the second quarter.

"We are reporting a loss in second quarter net earnings as a consequence of mark-to-market accounting despite the fact that our price hedges, covering about 60 percent of our production, were almost 50 percent higher than benchmark natural gas prices, and our natural gas production is about 10 percent more than one year ago. That's why we believe cash flow and operating earnings are a far better measure of Encana's financial performance," Eresman said.

Encana continues to manage natural gas price risks with an attractive hedge position on about 55 percent of forecast production for the remainder of 2010. Second quarter operating earnings were down due largely to lower realized gas prices compared to the second quarter of 2009 on a pro forma basis – a year when Encana had very attractive hedges at a price above $9 per thousand cubic feet (Mcf) on about two-thirds of the company's natural gas production.

Second Quarter 2010 Highlights


  • Cash flow of $1.2 billion, or $1.65 per share
  • Operating earnings of $81 million, or 11 cents per share
  • Net earnings, a loss of $505 million, or 68 cents per share
  • Capital investment, excluding acquisitions and divestitures, of $1.1 billion
  • Free cash flow of $118 million
  • Total production realized average price of $5.74 per thousand cubic feet equivalent (Mcfe), realized natural gas price of $5.50 per Mcf and realized liquids price of $67.05 per barrel (bbl). These prices include realized financial hedges
  • At the end of the quarter, debt to capitalization was 32 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 3.2 billion cubic feet per day (Bcf/d)
  • Natural gas liquids (NGLs) and oil production of about 24,000 barrels per day (bbls/d)
  • Operating and administrative costs of $1.11 per Mcfe

Strategic developments

  • Signed a memorandum of understanding with CNPC that outlines a framework to negotiate a potential joint-venture investment in the development of certain lands in Encana's natural gas plays in British Columbia
  • Announced accumulation of significant land position of about 250,000 net acres of land in the Collingwood shale play in Michigan
  • Drilled exploration well into Encana's new Brent Miller field in Texas that showed promising results, flowing at 32 million cubic feet per day (MMcf/d)
  • Divested non-core natural gas and oil assets in North America for approximately $208 million.

Second quarter natural gas production up 12 percent per share

Total production in the second quarter of 2010 was 3.3 Bcfe/d, up about 10 percent per share from 3.1 Bcfe/d in the second quarter of 2009, on a pro forma basis. Stronger production was primarily due to successful drilling in U.S. key resource plays, and was partially offset by lower volumes of about 150 MMcf/d due to divestitures. Natural gas production was 3.2 Bcf/d compared to 2.9 Bcf/d in the second quarter of 2009, on a pro forma basis. USA Division second quarter production increased 17 percent to 1.9 Bcfe/d, led by very strong growth in the Haynesville shale, where production averaged about 269 MMcfe/d, up from 54 MMcfe/d in the second quarter of 2009. Piceance production grew close to 29 percent to average about 470 MMcfe/d. Canadian Division production averaged about 1.4 Bcfe/d in the second quarter, down about 3 percent largely as a result of divestitures. Production growth remained steady in Cutbank Ridge, Bighorn and the Greater Sierra resource play, which includes the Horn River shale play, where production averaged about
24 MMcfe/d in the second quarter.

Canadian Division capital investment in the second quarter was $490 million, focused mainly on continuing steady growth from across the division. USA Division capital investment was $596 million, with about half directed to land retention drilling that is already delivering strong growth from the Haynesville shale.

Fast-growing Haynesville shale play joins Encana's key resource play list

"In the Haynesville shale, we've had some very exciting results to date, where production is expected to average 325 MMcfe/d this year, and exit the year at about 500 MMcfe/d. With such strong performance, Haynesville has been added to our list of key resource plays – projects that deliver close to 90 percent of the company's production. Our 2010 program is focused on drilling to retain land and we have plenty of opportunities to capture future efficiencies by optimizing our surface and drilling operations. This year, we have one gas factory pilot planned that will see eight wells drilled from a single pad. With careful and continual optimization, we believe that when we are operating in full gas factory mode, we can achieve substantial reductions in our drilling, completion, tie-in and operating costs," Eresman said.

New Brent Miller field in Texas shows promise

"During the second quarter, we drilled a promising well in the new Brent Miller field, a sizable Texas extension of the Haynesville and Mid-Bossier trends. Our well initially flowed at 25 MMcf/d, but when a second wing valve was added, production from the 14,500-foot well increased to 32 MMcf/d. This is a very promising well in this new play where we have about 45,000 net acres across the heart of very prospective lands," Eresman said.

Encana establishes strong land position in Michigan’s Collingwood shale

Over the past two years, Encana has assembled a significant land position in a promising new natural gas shale play in Michigan. Encana has acquired about 250,000 net acres of land in the Collingwood shale play. The company's first exploration well delivered encouraging test results, flowing during a 30-day initial production test at about 2.5 MMcf/d, including natural gas liquids constituents and condensate. With further drilling, Encana hopes to demonstrate stronger gas rates as the company optimizes well completion practices and proves up liquids-rich potential in some parts of the play.

Solid operating results in a low price environment

Encana focuses on operating earnings as a better measure of quarter-over-quarter earnings performance because it excludes the variability associated with unrealized hedging gains/losses and non-operating foreign exchange gains/losses. Second quarter operating earnings were $81 million in 2010 compared to $472 million in the same period last year, which is down largely due to a quarter-over-quarter decrease in average realized prices from $7.05 to $5.74 per Mcfe. In the second quarter of 2010, realized after-tax hedging gains were $263 million, down from $686 million in the second quarter of 2009, on a pro forma basis. Also impacting second quarter operating earnings was a $128 million increase in depletion compared to the same quarter last year due to increased production and higher foreign exchange rates.

About 55 percent of natural gas production hedged for remainder of 2010

Encana has hedged approximately 1.9 Bcf/d, about 55 percent of expected 2010 natural gas production, at an average NYMEX price of $6.05 per Mcf as of June 30, 2010. In addition, Encana has hedged approximately 1.2 Bcf/d of expected 2011 natural gas production at an average price of about $6.33 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's ability 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. Risk management positions at June 30, 2010 are presented in Note 14 to the unaudited Interim Consolidated Financial Statements.

Corporate developments

Guidance updated

Encana has increased its 2010 guidance for total production by 65 MMcfe/d to 3.365 Bcfe/d. Encana has also increased its capital investment guidance by $500 million, taking 2010 capital investment from $4.5 billion to $5.0 billion, and has reduced operating cost guidance by 10 cents to 80 cents per Mcfe. Encana has provided 2010 guidance for a weighted average number of outstanding shares of approximately 740 million. Total cash flow guidance is unchanged. Based on Encana's guidance in 2010 of 740 million shares, the range of cash flow per share has been increased by 10 cents to between $5.95 and $6.50. Encana has also lowered its natural gas price expectation for the remainder of the year to NYMEX $5.00 per Mcf, from $5.75 per Mcf.

Encana and CNPC look to jointly develop Canadian unconventional natural gas

On June 24, 2010 Encana and CNPC signed a memorandum of understanding that outlines a framework for the two companies to negotiate a potential joint-venture investment in the development of certain lands in Encana's natural gas plays in Horn River, Greater Sierra (Jean Marie formation) and Cutbank Ridge (Montney formation) in northeast British Columbia. Under a potential joint venture, Encana would be the operator of all developments, meaning it would drill and complete the wells, build the processing facilities and pipelines and conduct all field work for the joint venture. CNPC would invest capital to earn an interest in the assets and gain an advanced understanding of unconventional natural gas development through an ongoing sharing of technical knowledge. The companies expect that it will take several months to negotiate a potential joint venture, which would be subject to typical conditions precedent, including the negotiation of acceptable terms and conditions, receipt of the Encana Board of Directors' approval of the final terms of the proposed joint venture and receipt of any necessary regulatory approvals.

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 approximately 13 years. The company has upcoming debt maturities of $200 million in September 2010 and $500 million in 2011. At June 30, 2010, Encana had $4.8 billion in unused committed credit facilities. With Encana's bank facilities undrawn and $1.5 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 June 30, 2010, the company's debt to capitalization ratio was 32 percent and debt to adjusted EBITDA was 1.6 times, on a trailing 12-month basis, using 2009 pro forma results.

In the second quarter of 2010, Encana invested $1.1 billion in capital, excluding acquisitions and divestitures, with a focus on continued development of the company's key resource plays. Encana invested about $124 million in acquisitions in the second quarter and divested about $208 million of non-core properties.