Current ECA Stock Info

2017 Development to focus on Permian, Eagle Ford, Montney

Encana (ticker: ECA) announced fourth quarter earnings and 2016 reserves Thursday, showing a net loss of $281 million, ($0.29) per share. Full year results were a loss of $944 million, or ($1.07) per share. These results were hampered by special charges including impairments and a net loss on risk management. After adjusting for these items, fourth quarter and full year results are $85 million and $76 million, respectively.

2016 reserves were down slightly at 789.7 MMBOE, from 799.4 MMBOE last year. The decrease is due to the sale of DJ basin assets, among others, as Encana replaced 175% of production in 2016. The company slightly increased its liquids exposure in 2016, with oil and NGL making up a combined 39% of reserves at year end, up from 36% last year.

Encana estimates total 2017 CapEx of $1.6-$1.8 billion, to drill an estimated 270 net wells. This is a significant increase from 2016, when Encana’s CapEx was about $1.1 billion.

Encana Davidson pad largest development in Permian

Like many other E&P companies, Encana expects to focus on the Permian in 2017. The company estimates that it will use 5 rigs to drill around 140 net wells in the next year, for about $800 million. This drilling program will grow production in the basin by 50% from Q4 2016 to Q4 2017. Encana highlighted the results of the Davidson pad, which the company describes as the largest full scale development in the Permian. 19 wells will be drilled from the pad in Q1 2017, bringing the total to 33 wells from a single large pad.

Encana Plans to Grow Permian Production by 50% in 2017

Source: Encana Q4 Investor Presentation

In the Eagle Ford Encana tested a new completion design on three wells separated by about 25 miles. The company believes that the strong results from each well indicate good Austin Chalk potential over a sizeable portion of its acreage. Around 55 net wells will be drilled in the basin in 2017, using 2 rigs and about $250 million.

Encana Plans to Grow Permian Production by 50% in 2017

Source: Encana

Previous success in the Eagle Ford has been applied in the Montney, where the company tested an Eagle Ford completion design to great success. This design, focusing on tight clusters and thin fluid, yielded a 50% improvement in well productivity. Encana continues to ramp up activity in the Montney in preparation for two processing plants becoming operational in Q4 2017. 7 rigs will drill around 75 net wells in the basin, for around $260 million. Through this drilling program and focus on condensate-rich sections of the play Encana plans to more than double liquids production in the Montney from Q4 2016 to Q4 2017.

Encana Plans to Grow Permian Production by 50% in 2017

Source: Encana

Q&A from ECA Q4 conference call

Q: Do you plan to construct more of the super pads like the Davidson pad?

ECA President and CEO Douglas James Suttles: As we’re moving the thing forward, I think our basic development program here is to actually build pad facilities with the expectation we’ll reoccupy these pads on a regular basis as we develop the stack. We’re still trying to figure out the optimum size of these pads and I think our 14-well original pad was the largest in the Permian and now 33, I think we’re by far and away the largest pad in the basin. And I think we’ve mentioned before, we ultimately see that one location probably having up to 60 wells or maybe even 64 wells. We do think this is a way to maximize capital efficiency and the balance here is just trying to optimize cost structure with facility spend.

Q: Maybe just starting on the services and cost side, 60% to 70% locked in, what are you guys seeing on the other 30% to 40% in terms of percentage inflation? And what’s kind of baked into guidance versus, I guess, what you’re currently seeing today in the field across your areas?

Douglas James Suttles: First of all, in some service lines we actually see costs going down this year versus going up. Now, clearly the headlines are really about pressure pumping in a couple of the hardest basins. I mean, the two most active basins in North America are the Permian and the Montney. And, of course, in the Montney, you have a number of operators – we’re not one of those, but a number of operators who operate seasonally, which creates additional pressure, particularly this time of year.

So pressure pumping, we’ve seen request up in – of increases up into the mid-30% range, that doesn’t mean they’re getting those price increases. It’s the beginning of the negotiation, and in some cases, we’ve had to replace suppliers, because we couldn’t agree to terms.

In one example in the Permian, we locked in on 2016 rates for one frac spread with by creating some optionality and a guarantee of work for that spread in an optionality in the second one. So our team has been pretty creative about this.

And then in another area, sand and water make up a big piece of the cost of these wells. We actually think our sand costs are dropping this year, because of things we’ve done over the past two years. And our water costs are also being managed because of this use of produced water, which can save us up to $1 a barrel. And if you think of a typical frac in the Permian using 300,000 barrels of water, that’s a $300,000 savings.

So it is quite variable by service line. The remaining 30% has got ups and downs and small bits and pieces in there, and some of its field manage spend. But overall, in most of the product lines, the increases are – or the request anyway are small, pressure pumping is the one place where the expectations in new bids can be considerably higher than 2016 prices.

Analyst Commentary

From KLR Group:
We are increasing our ECA target price $2 to $18 per share due to higher price realizations and slightly lower Canadian capital intensity (minimal Duvernay capital allocation). Encana’s mid-cycle capital yield is ~115% versus the industry median cash recycle ratio of ~140%.
Growth guidance does not reconcile with current capital intensity; our ’21 production outlook is ~20% below the company’s expectation
Our ’17 production expectation of ~327 Mboepd is in the upper half of company guidance (320-330 Mboepd). Thereafter, given comparable capital plans, Encana anticipates achieving production of ~400 Mboepd in ’18 versus our expectation of ~350 Mboepd and ~500 Mboepd in ’21 (~50% liquids) versus our expectation of ~400 Mboepd in ’21 (~51% liquids).
After an extensive analysis exchange with Encana, the negative variance in our production outlook appears to be entirely attributable to the WCSB Montney. The difference largely relates to the company’s view as to the early production deliverability of Montney wells, which is ~2x greater than unconventional resource early time deliverability and the company’s own type curves.  

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