Current ECA Stock Info

Permian and Montney will receive 70% of all 2018 CapEx

Encana (ticker: ECA) announced fourth quarter results and reserves today, showing a net loss of $229 million, or ($0.24) per share. Despite this quarter’s loss, the company earned a net $827 million over the full year. Both of these results compare favorably to the company’s 2016 results, when Encana reported a net loss of $281 million and $944 million in Q4 and full year, respectively.

Encana reports its reserves grew to 375 MMBOE, up from 306 MMBOE in 2016. This represents a reserve replacement ratio of 228%, almost entirely due to additions from the drill bit.

Encana continues to build its Permian operations and produced 66.2 MBOEPD in 2017, up 37% from 2016 output. The company plans to sustain this growth rate through 2018, with Permian production expanding by 30%. The majority of this year’s Permian development, 70%, will target the Midland, Martin and Upton Counties.

Encana Montney Liquids Production to Double in 2018, Permian up 30%

Source: Encana Investor Presentation

Encana has moved to counteract recent service cost inflation, using several sources. Local sand will supply almost all the company’s demand in the Permian, eliminating the cost of transporting proppant from places like Wisconsin. Encana will also self-source some commodities, cutting out the middleman. These efforts, combined with operational efficiencies, will hold well costs flat year-over-year.

Montney liquids production to double

The company expects even more rapid growth from its Montney assets, where liquids production will double in the next year. Expanding liquids production means Encana’s Montney margins are growing, improving cash flow from the play. The Montney’s growth has been self-funded, and will continue to be in the coming years.

Encana continues to preach the benefits of “developing the cube,” which allows more efficient recovery from Permian-style stacked pay reservoirs. Additional improvements that the company is pursuing include higher-intensity completions and precision targeting of drilling and completions stages. According to Encana, these efforts have increased average 180-day IPs by over 25% for an increase in cost of 9%.

Encana Montney Liquids Production to Double in 2018, Permian up 30%

Source: Encana Investor Presentation

The company plans to spend between $1.8 billion and $1.9 billion in 2018, all of which will come from cash flow. About 70% of expenditures will go toward growing production from the Permian and Montney.

$400 million share repurchase program announced

Encana has also followed many large cap E&Ps by announcing a major share repurchase plan today. The company will spend up to $400 million to repurchase up to 35 million common shares over the next 12 months. The program will be funded with cash on hand.

Q&A from ECA conference call

Q: You spoke to the benefits to free cash flow from $55 WTI relative to $50. And looking at today’s prices and environment, that’s certainly understandable. I wanted to see, are you shifting your outlook and longer-term planning assumptions to $55, or just highlighting the near-term impact and 2019 impact at that price?

Douglas James Suttles: To be real honest, I’m not sure that we can tell that much of a difference fundamentally between $50 and $55. We’re encouraged by the recent trends. Our internal view is we expect crude prices to generally strengthen towards the end of the decade, but the pathway there could be pretty bumpy. So I think what we’re just trying to reflect is kind of current market conditions and actually show what it could do. The other thing we didn’t highlight too much on the call was is we have a pretty large hedge book in 2018 now. So we’re not really exposed to too much volatility in commodity prices over the balance of the year.

Q: And then you talked about the backend-loaded growth profile this year, partly on decline from flush wells brought online in the fourth quarter. Can you talk more about how that decline rates from your liquids-rich Montney wells and the production mix there are performing versus your expectations, and then in the Permian, how decline rates from the wells using the cube strategy are coming in versus your expectations?

Douglas James Suttles: I think that the shape of the year, it looks a little bit like last year but not as extreme. Partly, it’s just due to couple of things. One of the things I know we’ve talked to you about before is our goal here is to create the maximum value. So we kind of think about this as how do you maximize returns and recovery. And that can lead to some lumpy behavior, because if we bring a couple of cubes on at the end of one quarter, the next quarter looks particularly strong. And if we skip a quarter in that because of the schedule, it flattens out some, but it generates the best value. And then, of course, similar to last year, we do have in the Montney some infrastructure coming along.

But, Mike, maybe comments on both liquids-rich Montney well performance and cube well performance in the Permian.

Michael G. McAllister: I’ll start with the Permian. The number of wells that we’ve brought on, that reached their peak production in Q4 was actually double than what we would’ve seen in Q3. So we had a lot of production coming on and would be seeing sort of first year decline rates that has that impact in the first half of 2018. That being said – and we’re very, very pleased with the performance of those wells, with our tighter cluster spacing, we’re seeing significant improvement over where we were on type curve.

When I look at the Montney, again well performance there has been stronger than we’ve planned. In fact, we’re seeing higher condensate rates than we actually had in our type curve, so again a lot of confidence from that standpoint as well. It’s a function of the wells coming online and filling the available facility capacity in the Montney that drives the profile that you’re seeing there.

Q: Doug, you hit on this through your prepared remarks, but could we maybe just talk a little bit about buyback versus increasing the dividend today, and how you would kind of rank increasing dividend versus buying back additional shares, and then also how this program potentially impacts how you think about M&A?

Douglas James Suttles: As I outlined, we really see as the business begins to generate free cash and additional financial capacity, the three big buckets, and the last one I listed in the prepared remarks was about resiliency. We feel we’re in pretty good shape there. We’ve got our debt. It’s come down dramatically. We like where the leverage is going. On a run rate basis, we ended the year at 1.9. Our plan would have us ending it at about 1.4, so well within our range. When we look at how we’re protected with the combination of market diversification and our hedge book, so we feel like the resiliency piece is in a good place. So doing things like buying back commitments or debt doesn’t look particularly attractive right now.

When we look at the combination of buybacks versus dividends, the one thing we’re very aware of when – if we raise the dividend, we don’t want to pull it back again. So as we think about it – two things we’re watching is as commodity prices as we see how they play out kind of related back to Brian’s question, they are still volatile so market’s trying to find its rebalance point.

And the second thing is, is as the business – the cash flow is growing pretty dramatically. But clearly, we want to be very confident that it’s there and it’s going to continue to grow from there, which is combination of performance and pricing before we do that. So we’ve always stated, we’re committed to the dividend, but we looked at it carefully. So we think the buyback program is prudent.

And then lastly, on anything we do with the portfolio, what we’ve said is, is that very clearly it has to be accretive to the 5 year plan, and if it’s not, it wouldn’t make any sense. And that’s a fairly high bar, if you think about our portfolio and our development plan. So we went through that and had lots of debate and discussion – great discussions with our board. We came to the conclusion that the best choice today was a modest buyback program and that’s why we picked it.

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