Encana (NYSE: ECA) reported Q2 earnings and hosted its conference call, including comments about improved differentials of the Eagle Ford in comparison to the Permian. Excerpts from Encana’s Q2 earnings call are below:
Q: You mentioned that at today’s strip, Encana is going to generate free cash flow during 2018. If we look at the share buyback that you have seems to be characterized as more driven by some of the asset sales that you’ve done. So as Encana transitions to free cash flow, how do you think about the allocation there and is increasing the buybacks something that would be under consideration?
President & CEO of Encana, Doug Suttles: We have though what we call the three buckets which we think about as resiliency which, of course, is trying to make the company stronger in a down market. So, those are things like commitments and debt.
We’ve talked about direct return to shareholders, which are buybacks and dividends, and then we’ve talked about reinvesting in the business. And we continue to talk about those things with the board. And when we look at them, I think the one we have said is some of the resiliency measures given where our balance sheet is today don’t look particularly attractive. Obviously, we’re halfway through the buyback we announced, and I think as we tried to emphasize on the call, we are managing costs and driving efficiency very effectively so we’re turning margin – I mean, price into margin and returns. And that, as we’ve said all along, is critical for us to demonstrate that before we’d consider adding additional capital to the business and growing even faster.
I will tell you that – Reneé mentioned this – we have our regional price protection in the Permian between transport and basis hedges aligned with our five-year plan. But one advantage we do have is, obviously, we have other assets in the portfolio to invest into like the Eagle Ford, and we’re looking at all that. So, it’s a little early to say exactly what we’ll do. But if we can continue to demonstrate that we can manage cost and drive efficiency, that’ll be an important driver.
Q: Doug, … could you maybe just talk about the likelihood of incremental rig additions above the base plan for next year, potentially going to the Eagle Ford versus the Permian and how you kind of shape the Permian program next year ahead of your FTE ramp?
President & CEO of Encana, Doug Suttles: Yeah, Gabe. Yeah, it’s a great question. We’re working that very hard right now. Clearly, we have additional transport volumes in 2019 both to Houston and effectively to Corpus. But that’s really tied back to our original five-year plan.
So one of the things we’re looking at is we wouldn’t want to add additional activity in the Permian that just grows barrels into big diffs when we have other options like we have with the Eagle Ford. I mean if you look at today’s pricing, you would actually be getting at least $20 a barrel more off an Eagle Ford barrel versus a Permian barrel. So, Mike and his team are working quite hard to see what can we do efficiently beyond current activity levels. And that’s part of thinking about 2019 capital, but we don’t want to grow barrels in the Permian that are unprotected at the current diff market but we have other options in the portfolio.
Q: We’ve sort of been gravitating towards the Eagle Ford here, so I just thought I’d ask for a little update here. Page 9, slide 17 talks about stacked pay, infill spacing, and the Austin Chalk as sources for premium location upside. You’ve already mentioned the Austin Chalk today. Could you provide a quick update if stacked pay and infill drilling – infill spacing is being tested currently and maybe a little color if it is.
President & CEO of Encana, Doug Suttles: When we first started the Austin Chalk and it continues to be our approach, it’s geologically more complex than the main Eagle Ford zone. So, we’ve stepped into this carefully to make sure we would have strong results across those investments. And so, you’ve seen us slowly picking up the pace.
On spacing, we started out at a thousand foot well spacing in the Chalk. We’re now testing down at 500 feet. Bit early to make a call on that, but that’s what we’re looking at today.
The other thing that’s exciting in the Eagle Ford is an area we call the Graben which we currently don’t carry premium inventory in but we’ve now got several wells in there with our new high intensity completions which are performing quite good.
Mike, maybe you’d add some more color.
EVP & COO of Encana, Michael McAllister: With respect to the stacking question, we look at sort of a two stack in the Eagle Ford and then one in the Austin Chalk. And we’ve got some really encouraging results in the Graben here of late which gives us some confidence we can actually add to our premium inventory, [indiscernible] in the Eagle Ford zone. So, yeah, everything’s looking really quite positive on the Eagle Ford with respect to our well results right now.
Q: You guys just stayed ahead of some of the biggest headline risks kind of across the board in both Permian and the Montney, especially related to service costs, marketing for example. I know there’s been a big focus on the water hubs in the Permian recently. What are some of the things you’re working on now that you see as out year headwinds that you’re trying to get in front of today?
President & CEO of Encana, Doug Suttles: Well, a lot of it. What’s interesting is you’ve got to always try to drive the car through the windshield and not the rearview mirror. And so instead of looking at what’s happening right now recently, what are we anticipating to happen next? And clearly, with the differentials in the Permian, that’s going to affect activity levels in the Permian we believe, and we’re thinking about how we manage the supply chain through that period. Reneé spent a lot of time talking about how we try to integrate our view of markets. And this isn’t necessarily the macro but the in-basin markets. And then how we actually maximize our value across the portfolio. So that’s a big feature today of what we’re trying to anticipate.
Clearly, we were thinking pretty hard about what are the next things we can do to lower cost to offset other pressures which might try to increase cost. And Mike talked about in the Permian, third-party show us as by far the fastest driller in the basin at 12.5 days per well. We’ve got wells we’ve drilled at sub-9. And we’re trying to figure out how do we get all of our wells to sub-9 instead of at 12.5.
So we’re pushing in all these areas, and I think one of the things we’re trying very hard to do in the company is not let the mindset go that oil prices are higher. But to say we have to create value, to converting price to margin, and we have to do that through innovation both technically and commercially. I’d also point to our recent deal with Keyera as another example of that, where we’re creating flexibility and optionality in the business which we’re now seeing why that’s valuable. And I know we’ve been committed to that even when it wasn’t necessarily as popular, and I think we’re demonstrating now why it adds value.
Q: Margin conditions exist in the Eagle Ford for additional capital. You’ve touched on it, but I guess I’m wondering to what extent your inventory is expanding sufficiently to warrant additional capital there. Thanks.
President & CEO of Encana, Doug Suttles: Yeah, Jason, it’s kind of – in many ways, Eagle Ford is a pretty cool story. When we entered, we said we would grow it to about 50,000 barrels a day which we did. We also said when we entered the basin over four years ago now, that we had about 400 wells to drill. Four years later, we still say we have 400 wells to drill. And that’s everything from down-spacing to the Upper Eagle Ford to the Austin Chalk and now, the Graben. So, we can’t -this asset clearly is not near the scale of either the Permian or the Montney, but we could do more in that asset, but we have to make sure we do it wisely and efficiently.
It’s not going to become 100,000 barrel a day asset, but it could grow beyond what we’ve had in the past. And Mike and his team are working quite hard to make sure we can do that efficiently. We have two rigs there today. We’ve run as many as four at sometimes in the past, and we’re looking close at that for 2019.
