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Encana Focused on Core Assets for 2016; Flexible Capital

By: Ovintiv Inc

Share Print Bookmark    |    Monday,December 14,2015

Encana released a highly disciplined 2016 capital program today which directs 95 percent of its total $1.5 billion to $1.7 billion planned investment to its core four assets.

The company will continue to capture sustainable cost efficiencies and maintain operational momentum in its core four assets to grow high margin production, generate quality corporate returns and position the company for continued success in 2017.

Highlights include:

• 95 percent of 2016 capital to be invested in core four assets, with about 50 percent directed to the Permian
• disciplined capital program about 25 percent lower than 2015
• highly flexible capital program that can be scaled up or down and redirected based on market conditions
• an approximate 12 percent year-over-year increase in production from core four assets
• a more than 10 percent increase in operating margins
• a 10 to 15 percent reduction in drilling and completion costs and over 10 percent reduction in corporate costs

Operating Area

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Doug Suttles, Encana President & CEO, said: "Following the launch of our strategy in 2013, we have built a focused, high margin portfolio in North America's best plays, reduced debt, lowered costs and driven greater efficiency in our operations. As a result, every dollar we invest in 2016 will deliver higher margins and quality corporate returns. We will continue to deliver strong margin growth through 2016 by directing the majority of our capital to drilling and completions activity in our core four assets. This will maintain their scale and position the company to grow long-term shareholder value and cash flow into 2017 and beyond."

Encana's 2016 capital budget is around $600 million lower than 2015. Innovation continues to deliver significant year-over-year improvements in capital efficiency and operating performance which are expected to deliver a 12 percent increase in production from the company's core four assets and a more than 10 percent increase in operating margins after normalizing for commodity prices. The company will continue to benefit from decisive steps taken over the past two years to capture efficiencies and lower costs. Encana expects full-year 2016 corporate costs, such as interest and administrative expenses, to be more than 10 percent lower than in 2015, excluding one-time outlays, restructuring costs and long-term incentives.

Production from Encana's core four assets is expected to average between 260,000 to 280,000 barrels of oil equivalent per day (BOE/d), representing over 75 percent of total expected production. The company estimates total production of 340,000 to 370,000 BOE/d, liquids production of 120,000 to 140,000 barrels per day (bbls/d) and natural gas volumes of 1,300 to 1,400 million cubic feet per day (MMcf/d), each reflecting the impact of previously announced and completed divestitures in 2015.

Encana significantly enhanced its financial flexibility and reduced debt in 2015 through a C$1.44 billion bought deal equity offering and $2.8 billion in expected divestiture proceeds, and has no long-term debt maturities until 2019. The company will continue to proactively manage its balance sheet while executing on its strategy in 2016. The 2016 capital program is based on assumptions of $50 per barrel WTI oil prices and NYMEX natural gas prices of $2.75 per million British thermal units (MMBtu) and will be funded through expected cash flow of $1.0 billion to $1.2 billion along with existing credit facilities.

Encana is planning to reset its annualized 2016 dividend to $0.06 per share, or about $50 million per year. In addition the company will discontinue the dividend reinvestment plan discount after December 31, 2015. As a result, the combined cash and cash equivalent outlay associated with the dividend is expected to be reduced by over $185 million per year. This reset better aligns the dividend with cash flow and recognizes the importance of the balance sheet and the very high quality investment options in Encana's portfolio.

Risk Management Updates

At December 14, 2015, Encana has hedged approximately 95 MMcf/d of expected 2016 natural gas production using NYMEX fixed price contracts at an average price of $2.98 per thousand cubic feet (Mcf). In addition, Encana has protection on approximately 300 MMcf/d of expected 2016 natural gas production hedged under three-way options. The NYMEX three-way options are a combination of a sold call, purchased put and a sold put with average prices of $3.43, $3.21 and $2.72 per Mcf, respectively. These contracts allow the company to participate in the upside of commodity prices to the ceiling of the call option and provide the company with partial downside price protection through the combination of the put options. Encana has also executed 335 MMcf/d of 2016 NYMEX hedges as costless collars. These costless collars combine a sold call and purchased put with average strike prices of $2.46 per Mcf and $2.22 per Mcf, respectively. The costless collars allow the company to participate in the upside of commodity prices to the ceiling of the call option and provide downside protection at the sold put strike.

At December 14, 2015, Encana has hedged approximately 48 thousand barrels per day (Mbbls/d) of expected 2016 oil production using WTI fixed price contracts at an average price of $58.85 per bbl. Encana also has protection on approximately 18.3 Mbbls/d of expected 2016 oil production hedged under three-way options. The WTI three-way options are a combination of a sold call, purchased put and a sold put with average prices of $63.03, $55.00 and $47.24 per bbl, respectively.

Encana has also sold 30 Mbbls/d of WTI fixed price swaps at an average price of $50.34 per bbl for the fourth quarter of 2015. These swaps have an associated option for the counterparty to extend the fourth quarter 2015 fixed price swaps to first quarter of 2016 for the same volume and at the same price.