Copyright of the Daily Oil Bulletin 2017
Encana Posts Q2 Profit; Growth And Cost Savings To Offset Impact Of Dispositions
A profitable Encana Corporation expects production growth and cost reductions to more than offset the cash flow impact of dispositions this year, a conference call heard today.
This morning the company reported net earnings of $331 million versus a loss of $601 million in the second quarter of 2016.
(All dollar amounts are U.S. and all production volumes are after royalties.)
During the quarter total production averaged 316,000 boe a day, down from 368,300 boe a day in the corresponding 2016 period, reflecting the impact of asset sales.
Oil and NGL production rose to 124,900 bbls a day, down five per cent from the second quarter of 2016.
However, following the closing of the previously announced Piceance asset sale in the United States and continued liquids growth, Encana expects its liquids and natural gas mix to be largely balanced by year’s end. The sale of Encana’s Piceance natural gas assets is expected to close in the third quarter of 2017.
Citing asset sale proceeds and cash flow from expected strong operating performance, Encana is forecasting year-end net debt of about two times adjusted EBITDA. It also expects to have total liquidity of more than $5 billion.
Encana has no debt maturities until 2019 and almost 75 per cent of its long-term debt isn’t due till 2030 or later.
The company credits cost efficiencies, $3 billion in debt reduction since 2014, and production growth from its four core areas—the Montney and Duvernay plays in Canada, and the Permian and Eagle Ford plays in Texas.
“The expected 2017 cash flow impact of our dispositions this year is roughly $100 million. This has now been more than offset in 2017 through production growth and cost efficiency,” said Sherri Brillon, Encana’s chief financial officer.
“Our strong second-quarter results demonstrate that our business is working well at today’s prices. Our cash flow operating margin and corporate margin all grew even though index prices were about five per cent lower, quarter over quarter,” Brillon told today’s earnings conference call.
“Our Q2 corporate margin was up 25 per cent from Q1. This is a direct result of our improving product mix and continued cost reduction.”
“On a consolidated basis, our liquids mix in the quarter increased to 40 per cent of total production. This is a significant step change from 35 per cent in Q1,” she added.
During the quarter the core assets returned to growth ahead of schedule with liquids production from the Core Four growing by 15 per cent.
“We now expect Q4 2017 production growth of the core assets to be between 25 per cent to 30 per cent versus Q4 2016,” Brillon said, adding the company had previously predicted growth of “over 20 per cent” from the core plays.
“This added growth continues to be focused on high-margin oil and condensate with expected growth of 35 per cent to 40 per cent Q4 2017 versus Q4 2016.”
Following the close of the Piceance sale, “core asset production will dominate the portfolio at over 90 per cent of total company production,” Brillon said.
In the second quarter, core asset production averaged 246,500 boe a day, up 9,200 boe a day from the previous quarter.
Mike McAllister, Encana’s chief operating officer, reported significant year-to-date well productivity improvements. As a result Encana reported an overall 10 per cent improvement to its 2017 capital efficiency.
To reflect the increased well productivity and improved capital efficiency across its portfolio, Encana has updated its 2017 guidance.
Excluding the impact of the announced dispositions, Encana is increasing its production forecast by 8,000 boe a day—roughly evenly split between liquids and gas.
However, due to asset sales, total 2017 production is expected to average 310,000-320,000 boe a day, down from 352,700 boe a day last year.
Capital guidance remains unchanged at $1.6 billion to $1.8 billion.
Brillon cited the company’s success at “more than offsetting inflation.”
“The bottom line is that we’re getting more production and cash flow for the same capital,” she told analysts. “We are also dropping our per-unit T&P [transportation and processing] and operating-cost guidance, demonstrating our continued success in driving costs lower to enhance margins.”
Boosting premium type curves
Driven by cube development, optimized completions, improved targeting and lower costs, Encana said it outperformed its average 180-day initial production (IP180) type curves by between 20 to 45 per cent.
As well, the company said it has grown its “premium return” well inventory to more than 11,000 locations “including the replacement of all premium wells drilled since October 2016.”
In the Permian, Encana delivered a 20 per cent increase in IP180 type curves and increased its premium return well inventory by 700 locations. The company has 45 cube wells on production and aims to create additional upside through advanced completions design and new “benches,” or formations.
In the Montney, Encana reported a 25 per cent increase in IP180 type curves and increased its premium return well inventory by 1,000 locations. The company expects to double oil and condensate production from the fourth quarter of 2016 to the fourth quarter of 2017 and has drilled 28 condensate-rich cube wells in the Tower North area.
In the Eagle Ford, Encana delivered a 45 per cent increase in average IP180 type curves and grew oil and condensate production by 30 per cent from the previous quarter. The company increased its premium return well inventory by 40 locations.
In the Duvernay, the company said it had replaced all of the 30 premium return well locations it drilled since October 2016.