OREANDA-NEWS. Encana's relentless focus on execution excellence during the second quarter has driven another step change in efficiency improvements and returns. As a result, the company has lowered cash costs, such as transportation, processing and operating expenses, and improved capital efficiency in its updated 2016 guidance. Driven by efficiency improvements, Encana is also raising its 2016 production guidance. The company expects to use proceeds from announced dispositions to further strengthen its balance sheet and increase its capital investment into high return opportunities in its core four assets.

Highlights from the quarter include:

  • cash flow up over 75 percent from the previous quarter to $182 million or $0.21 per share
  • operating earnings of $89 million or $0.10 per share, up from a first quarter operating loss of $130 million or $0.15 per share
  • 95 percent of capital invested in high return wells in the core four assets; the Permian, Eagle Ford, Duvernay and Montney
  • maintained scale in the core four assets which delivered 268,300 barrels of oil equivalent per day (BOE/d), representing 73 percent of the company's 368,300 BOE/d total production
  • new Permian 14-well pad peaked at 12,000 BOE/d and is currently producing over 10,000 BOE/d gross
  • announced Gordondale and DJ Basin divestitures are expected to close by the end of July 2016

"We are one of the lowest cost, highest performing operators in each of our core four plays," said Doug Suttles, Encana President & CEO. "Our success in capturing significant capital efficiency gains continues to increase our returns. By reinvesting savings and modestly increasing capital, we are adding 50 percent more drilling and completions activity to our 2016 program."

"We expect to use proceeds from announced divestitures to strengthen our balance sheet and modestly increase our 2016 capital program. We anticipate this additional activity will deliver approximately 13,000 BOE/d of production from our core four assets in the fourth quarter of this year and between 30,000 to 35,000 BOE/d in 2017, of which approximately 75 percent will be liquids," added Suttles.

Increased capital efficiency and operational performance in core four assets

Encana beat its 2016 drilling and completions cost reduction targets in the first quarter. In the second quarter the company continued to lower drilling and completion costs across its four core assets and they are now over 30 percent lower compared to the 2015 full-year average. In addition, Encana delivered new pacesetter performance and has a track record of rapidly converting pacesetter benchmarks into average costs.

In the Permian, Encana built on its track record as a leading innovator by completing the Midland Basin's first 14-well pad. This peaked at 12,000 BOE/d and is currently producing over 10,000 BOE/d gross. In addition, it delivered a 10 percent quarter-over-quarter reduction in average drilling and completions costs. These costs are 31 percent lower than the full-year 2015 average. Encana is now the second largest producer in the core of the Midland Basin.

In the Eagle Ford, Encana delivered a new pacesetter well at a cost of $3 million. Average drilling and completions costs in the second quarter in the play were 38 percent lower than the 2015 average.

In the Duvernay, Encana delivered a $6.8 million pacesetter well. The second quarter average drilling and completions costs were approximately 40 percent lower than the company's 2015 average.

In the Montney, Encana continued to deliver strong results from its condensate-rich wells in the Tower, Dawson South and Pipestone areas. Combined, these areas offer a potential inventory of almost 6,000 condensate-rich well locations. Second quarter average drilling and completions costs were down 14 percent compared to the first quarter and 33 percent lower than the full-year 2015 average.

Continued cost and capital efficiency and disciplined balance sheet management

Encana continued to capture significant cost savings during the second quarter. As a result, the company is lowering its guidance for transportation, processing and operating costs by $100 million for the year. Encana expects the full-year benefit of these savings will be even greater in 2017.

Encana is reinvesting savings from continued capital efficiency improvements and expects to use a portion of proceeds from its Gordondale and DJ Basin divestitures to increase its 2016 capital program by $200 million. As a result, after adjusting for the Gordondale divestiture, the company is increasing its 2016 production guidance and expects fourth quarter exit production decline from its core four assets to be cut from 10 percent to five percent. Encana's Gordondale and DJ Basin divestitures are expected to close by the end of July delivering proceeds of approximately $1.1 billion.

Second quarter results

Encana's core four assets contributed 268,300 BOE/d or approximately 73 percent of total second quarter production of 368,300 BOE/d. Total liquids production averaged 132,000 barrels per day (bbls/d) and natural gas production averaged 1.4 billion cubic feet per day (Bcf/d).

Encana generated second quarter cash flow of $182 million or $0.21 per share, compared to $181 million or $0.22 per share in the second quarter of 2015. The company recorded second quarter operating earnings of $89 million or $0.10 per share compared to an operating loss of $167 million or $0.20 per share in the second quarter of 2015. The second quarter net loss of $601 million, or $0.71 per share, is largely attributable to non-cash items such as after-tax ceiling test impairments and an after-tax unrealized hedging loss.

Encana's Risk Management Program

As at June 30, 2016, Encana has hedged approximately 78 percent of its remaining expected 2016 oil and condensate production at an average price of $55.91 per barrel and 86 percent of expected natural gas production at an average price of $2.63 per thousand cubic feet (Mcf).

Encana has about 15,500 bbls/d of expected 2017 crude and condensate hedged using WTI fixed price contracts at an average price of $49.49 per bbl. In addition, the company has hedged 10,000 bbls/d under WTI three-way options for the second half of 2017. The company also has 300 million cubic feet per day (MMcf/d) of expected 2017 natural gas production hedged under three-way options and 350 MMcf/d using NYMEX fixed price contracts for the first quarter of 2017.

Dividend Declared

On July 20, 2016, the Board declared a dividend of $0.015 per share payable on September 30, 2016 to common shareholders of record as of September 15, 2016.

Second Quarter Highlights
 
Financial Summary
(for the period ended June 30)    
($ millions, except per share amounts) Q2 2016 Q2 2015
Cash flow 1 182 181
  Per share diluted 0.21 0.22
Operating earnings (loss) 1 89 (167)
  Per share diluted 0.10 (0.20)
Earnings Reconciliation Summary  
Net earnings (loss) (601) (1,610)
After-tax (addition) deduction:    
  Unrealized hedging gain (loss) (310) (187)
  Impairments (331) (1,328)
  Restructuring charges - (10)
  Non-operating foreign exchange gain (loss) (48) 114
  Gain (loss) on divestitures (1) 1
  Income tax adjustments - (33)
Operating earnings (loss) 1 89 (167)
  Per share diluted 0.10 (0.20)

1 Cash flow and operating earnings are non-GAAP measures as defined in Note 1.

 
Production Summary
(for the period ended June 30)      
(after royalties) Q2 2016 Q2 2015 % Change
Natural gas (MMcf/d) 1,418 1,568 (10)
Liquids (Mbbls/d) 132.0 127.3 4
       
Natural Gas and Liquids Prices
  Q2 2016 Q2 2015
Natural gas    
NYMEX ($/MMBtu) 1.95 2.64
Encana realized gas price 1 ($/Mcf) 1.86 3.52
Oil and NGLs ($/bbl)    
WTI 45.59 57.94
Encana realized liquids price 1 38.47 43.78

1 Realized prices include the impact of financial hedging.

Reporting Requirements

Effective January 1, 2017, Encana intends to comply with Securities and Exchange Commission reporting requirements applicable to U.S. domestic issuers and, accordingly, will file its annual report on Form 10-K for the year ended December 31, 2016 and regular periodic reports under both Canadian and U.S. law thereafter.

Second Quarter Conference Call

A conference call and webcast to discuss the 2016 second quarter results will be held for the investment community on July 21, 2016 at 7 a.m. MT (9 a.m. ET). To participate, please dial (866) 223-7781 (toll-free in North America) or (416) 340-2216 approximately 10 minutes prior to the conference call. An archived recording of the call will be available from approximately 10 a.m. MT on July 21 until 11:59 p.m. MT on July 28, 2016 by dialing (800) 408-3053 or (905) 694-9451 and entering passcode 6349633.

Encana Corporation

Encana is a leading North American energy producer that is focused on developing its strong portfolio of resource plays, held directly and indirectly through its subsidiaries, producing natural gas, oil and natural gas liquids (NGLs). By partnering with employees, community organizations and other businesses, Encana contributes to the strength and sustainability of the communities where it operates. Encana common shares trade on the Toronto and New York stock exchanges under the symbol ECA.

Important Information

Encana reports in U.S. dollars unless otherwise noted. Production, sales and reserves estimates are reported on an after-royalties basis, unless otherwise noted. Per share amounts for cash flow and earnings are on a diluted basis. The term liquids is used to represent oil, NGLs and condensate. The term liquids rich is used to represent natural gas streams with associated liquids volumes. Unless otherwise specified or the context otherwise requires, reference to Encana or to the company includes reference to subsidiaries of and partnership interests held by Encana Corporation and its subsidiaries.