OREANDA-NEWS. Fitch Ratings has assigned a long-term Issuer Default Rating (IDR) of 'BBB-' to Encana Corp. (NYSE: ECA). Fitch has also assigned ECA a short-term IDR of 'F3'.

The Rating Outlook is Negative.

Approximately $5.4 billion in debt is affected by today's rating action. A full list of rating actions follows at the end of this release.

Ratings for Encana consider the company's moderate asset scale and production volumes, gas-weighted production profile, and numerous actions the company has taken to improve the credit profile and bolster overall liquidity. These include issuing approximately $1 billion in equity in 2015 that went directly to reduce gross debt with a focus on near-term maturities, approximately $10 billion in completed asset sales since 2013 leading to a more focused asset base, and improvements in the operating cost structure. The rating also reflects below-average full-cycle economics, a reduced asset and production base post asset sales, and the potential for a loss of operational momentum linked to capex cuts. Despite some concerns around the core asset base quality, runway, and execution of the long-term asset strategy, the company's resulting profile and corporate actions to defend credit quality are in line with an investment grade profile. Fitch expects lower production volumes and EBITDA in 2016. However, liquidity remains adequate in Fitch's base case and near-term maturities are not an issue, providing additional time to implement cost structure improvements and liquidity-enhancing measures.

The Negative Outlook is driven primarily by execution risks related the size and timing of potential asset sales, as well as concerns about the longer-term impact that capex cuts and non-core asset sales may have on the company's profile.

KEY RATING DRIVERS

Moderate Asset Scale and Production Volume
ECA has moderate asset scale, with four primary positions; the Permian, Eagle Ford (U.S.), Duvernay, and Montney (Canada). In the fourth quarter of 2015, total production averaged 406.8 mboe/d, with these four strategic assets contributing approximately 274.4 mboe/d (67%). ECA expects to focus its reduced 2016 capital budget on these four strategic assets. Fitch generally views the transition to focus on core assets favorably, as Fitch tends to prefer scale within positions rather than companies who are spread too thin, particularly when capital budgets are flexed down. Fitch thinks that the company's current positions provide decent near-term runway, particularly given lower anticipated activity levels in 2016 and 2017.

Fitch expects production volumes to decrease in 2016 and 2017 based on significantly lower capex combined with the effect of asset divestitures. Lower capex will help support ECA's liquidity in the short run as the company manages towards cash flow neutrality, but in a sustained commodity price downturn the company may have trouble maintaining operational momentum in its core positions.

Natural Gas Weighted with Growing Liquids Production
In 2015 production was 33% liquids (crude oil and natural gas liquids). In the past ECA has been highly gas-weighted but has shifted towards liquids in pursuit of higher margin production. The utility of this shift has been reduced in the short run by declining oil and NGL prices, but a more balanced production profile is a credit positive as the company doesn't have overwhelming production leverage to the price of a single commodity, providing a diversification benefit.

Numerous Actions Completed to Strengthen Balance Sheet
ECA has pursued an aggressive policy of asset sales and debt reduction to defend an investment grade credit profile. Since 2013 approximately $10 billion in completed asset sales have helped to prune the overall asset base, create better operational focus, fund reduction to gross debt, as well as the entry into the Permian and Eagle Ford via acquisitions. The company expects to close a $900 million sale of DJ Basin assets in Q2 2016. ECA has cut the dividend two times to preserve liquidity, most recently to $51 million per year, down from as much as $558 million in 2012. The company has also reduced capex significantly, cutting 2016E capex to $1 billion from $2.5 billion in 2014 and $2.2 billion in 2015.

Collectively, these actions serve as a material support for the credit as it better aligns the company's capital structure with a reduced asset base and should allow the company to better weather commodity price volatility. Fitch expects that ECA will continue to pursue monetizations of non-core assets in order to strengthen the balance sheet and enhance liquidity.

Subpar Historical Reserve Replacement
Three-year average organic replacement was -4% and 24% in 2014 and 2015, respectively, driven by substantial price-related revisions, asset repositioning, and limited additions from extensions and development activity relative to spending levels. Three-year average FD&A was $49/boe in 2015, driven higher by the 2014 acquisitions and price revisions. Reserve replacement will be an area of focus as Fitch monitors management's operational execution and ECA credit quality.

Hedge Protection Falling Off in 2017
Based on hedge positions as of Feb 26, 2016, ECA has approximately 75% 2016 (March to December) oil & gas volumes hedged. Fitch estimates total cash hedging receipts of $528 million in 2016, falling off sharply in 2017. ECA has a portion of gas production hedged for 2017, but these provide minimal cash flow support at Fitch's base case. However, they would provide moderate cash flow support in a stress case scenario. Fitch anticipates that ECA will continue to hedge production volumes consistent with its historical hedging policies. However, Fitch does not assume prospective hedging volumes or swap/collar prices in forecasting future cash flows and subsequent credit metrics.

Recent Financial Performance
As calculated by Fitch, ECA's 2015 year end debt/EBITDA rose to 2.1x versus 1.8x in 2014. This was offset by a 36% decline in EBITDA due to lower price realizations and lower production volumes related to asset sales. The company has been proactive in reducing debt with gross debt decreasing by approximately $2 billion in 2015, which has helped to support credit metrics. Fitch expects ECA to be moderately FCF negative in 2016 and 2017 but believes this should be manageable given ECA's current liquidity position and potential for additional non-core asset sales.

As calculated by Fitch, ECA's cash netbacks after hedges were $14.7 per BOE in 2015, moderately lower than the $15.5 received in 2014. Debt to 1P rose to 6.7x in 2015, primarily due to the effect of lower LTM pricing on reserve calculations. Encana's 2015 debt/flowing barrel of $13,181/boe compares favorably amongst investment grade E&P peers. However, further material declines in production volumes, either through asset sales or natural declines not offset by new production, could create stress in credit metrics if not offset by lower levels of gross debt.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Encana include:

--Base case WTI oil price that trends up from $35/barrel in 2016 to a long-term price of $65/barrel;
--Base case Henry Hub gas that trends up from $2.25/mcf in 2016 to a long-term price of $3.25/mcf;
--Total 2016 production of 350 mboe/d;
--Capex of $1 billion in 2016;
--Hedge positions as of Feb 26, 2016 are applied the cash flow model, with estimated 2016 proceeds of $528 million in Fitch's base case;
--Additional non-core asset sales are pursued.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Inability to reduce gross leverage through asset sale proceeds or other creditor-friendly measures
--Mid-cycle Debt/EBITDA above 3.0x
--Mid-cycle debt/flowing above $16,500
--Poor organic reserve replacement, negative cash netbacks, and/or uneconomic capex deployment

Continued operating cost improvements, prudent capital deployment, and continued aggressive protection of the rating through asset sales and/or equity issuance may be required to weather a sustained downturn in oil & natural gas prices at an investment-grade rating.

To remove the Negative Outlook at 'BBB-':

--Successful completion of non-core asset sales with proceeds used to reduce gross debt
--Mid-cycle Debt/EBITDA below 3.0x

For an upgrade to 'BBB' (individually or collectively)

--Total company production approaching 500 mboe/d
--Evidence of sufficient runway in core positions to support credit quality and scale consistent with 'BBB' peers
--Mid-cycle Debt/EBITDA below 2.5x
--Mid-Cycle Debt/Flowing Barrel below $14,000/boe
--Improved full-cycle economics via economic reserve additions and operating cost improvements

Upgrades to 'BBB' are not considered probable over the rating horizon.

Adequate Liquidity at YE15, No Near-Term Maturities
At YE15, ECA had $4.2 billion of liquidity, consisting of $3.9 billion undrawn on unsecured revolving credit facilities and cash on hand of $271 million. The facilities remain committed through July 2020. When combined with asset sales of $900 million to be received in Q2 2016, Fitch expects that near-term liquidity will be more than adequate to fund the company's reduced capex budget. ECA has been proactive about reducing debt with a focus on near term maturities. As of YE15, the next maturities include $500 million due 2019 and $600 million due 2021.

Fitch expects adequate liquidity, as asset sale proceeds should reduce outstanding draw on the credit facilities, and the reduced capex budget will likely be scaled close to operating cash flow, including hedge proceeds. Fitch's base case expects that available liquidity will remain above $4 billion, and the company has limited near-term maturities that could create calls on liquidity. A significant portion of ECA capex is discretionary, so the company retains significant flexibility in lower for longer price environment. However, this would have knock on effects on production volumes and operational momentum that could prompt rating changes despite sufficient liquidity.

FULL LIST OF RATING ACTIONS

Fitch has assigned the following ratings:

Encana Corp.
--Long-term IDR 'BBB-';
--Senior unsecured notes 'BBB-';
--Senior unsecured credit facility 'BBB-';
--Short-term IDR 'F3';
--Commercial paper 'F3'.