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Article Excerpt
EnCana and Cenovus Energy release 2010 preliminary budgets
CALGARY, Alberta -- EnCana Corporation (TSX & NYSE: ECA) continued to deliver strong operating and financial results in the third quarter of 2009, despite low natural gas prices. EnCana generated third quarter cash flow of US$2.1 billion, or $2.77 per share, and operating earnings of $775 million, or $1.03 per share - down 26 and 46 percent respectively compared to the third quarter of 2008. EnCana's financial performance was significantly enhanced by commodity price hedges, which contributed $913 million in realized after-tax gains, or $1.22 per share, to cash flow in the third quarter.
Shut-in and curtailed gas coming back on this winter
To help preserve shareholder value on the expectation that natural gas prices would rise to more economic levels, EnCana curtailed or shut in about 500 million cubic feet per day (MMcf/d) of natural gas production in the third quarter. These shut-in and curtailed volumes are expected to be brought back on stream during the winter of 2009/10. Total third quarter production was about 4.4 billion cubic feet equivalent per day (Bcfe/d), down 7 percent compared to one year earlier. While natural gas production was down about 9 percent to 3.6 billion cubic feet per day (Bcf/d), oil and natural gas liquids (NGLs) production increased about 4 percent to 139,000 barrels per day (bbls/d), led by a 44 percent production increase from the Foster Creek enhanced oil project. Natural gas production in the first nine months of 2009 was 3.7 Bcf/d, which is higher than the company's 2009 guidance of 3.6 Bcf/d. This reflects EnCana's operational success even during a period when it chose to curtail production due to low prices.
"Our company's solid operational and financial performance during a period of weak prices is evidence that EnCana's strategy is working. We remain focused on being the lowest cost producer by applying advanced technologies and by pursuing operational efficiencies across all resource plays. In addition, our successful hedging program has helped us sustain strong cash flow. To help preserve the value of our resource base, we have curtailed significant natural gas production in many of our operating areas and have significant productive capacity available to bring to market as prices recover," said Randy Eresman, EnCana's President & Chief Executive Officer.
IMPORTANT NOTE: EnCana reports in U.S. dollars unless otherwise noted and follows U.S. protocols, which report gas and oil production, sales and reserves on an after-royalties basis. The company's financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP). Per share amounts for cash flow and earnings are on a diluted basis.
EnCana Third Quarter 2009 Highlights
(all year-over-year comparisons are to the third quarter of 2008)
Financial
* Cash flow was $2.1 billion or $2.77 per share, a decrease of 26 percent
* Operating earnings were $775 million or $1.03 per share, down 46 percent
* Net earnings were $25 million or 3 cents per share
* Capital investment, excluding acquisitions and divestitures, was $1.3 billion, down 16 percent, primarily due to lower drilling and completion expenditures as a result of fewer wells drilled and cost deflation
* Free cash flow was $741 million, down 39 percent (Free cash flow is defined in Note 1 on page 9)
* Realized natural gas prices were $7.31 per thousand cubic feet (Mcf), down 8 percent, and realized liquids prices were $57.39 per barrel (bbl), down 37 percent. These prices include financial hedges
* At the end of the quarter, debt to capitalization was 25 percent and debt to adjusted EBITDA was 1.1 times. These ratios do not include the $3.5 billion of debt securities intended for use by Cenovus, the proceeds of which have been placed in escrow pending the completion of the split transaction
* Paid a dividend of 40 cents per share
* EnCana's integrated oil business venture with ConocoPhillips generated $266 million in operating cash flow, including $180 million from the Foster Creek and Christina Lake upstream projects, and $86 million from the downstream business
Operating - Upstream
* Total natural gas production was 3.6 Bcf/d, down 9 percent, primarily due to a decision to shut in or curtail about 500 MMcf/d of production because of the low price environment and natural declines in conventional properties. This reduced production was partially offset by lower royalty volumes in Alberta due to price sensitive royalty rates
* Total oil and NGLs production was more than 139,000 bbls/d, an increase of 4 percent
* Foster Creek and Christina Lake oil production grew 43 percent to approximately 45,000 bbls/d net to EnCana
* Operating and administrative costs were $1.26 per thousand cubic feet equivalent (Mcfe), which is up from 79 cents per Mcfe in the third quarter of 2008, a period when there was a large recovery of long-term incentive costs as a result of a significant decline in the EnCana share price. These higher 2009 costs were offset primarily by a weaker Canadian dollar and lower purchased fuel and workover costs
Operating - Downstream
* Refined products averaged 451,000 bbls/d (225,500 bbls/d net to EnCana), up 3 percent
* Refinery crude utilization was 94 percent or 425,000 bbls/d crude throughput (212,500 bbls/d net to EnCana), up 3 percent
* The Wood River coker and refinery expansion (CORE) project was approximately 62 percent complete at the end of September.
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Price risk management affects net earnings
Operating earnings include the realized hedging gains and losses which reflect the actual value of the hedging contracts when settled. Management believes operating earnings are a better measure of performance because they remove the variability associated with unrealized mark-to-market accounting accruals. Net earnings include both realized hedging gains/losses and unrealized mark-to-market accounting gains/losses.
Net earnings in the third quarter of 2009 were affected by the combined impact of realized and unrealized hedging gains/losses which resulted in an $18 million after-tax decrease to net earnings in 2009 compared to a $1.8 billion after-tax increase to net earnings in the third quarter of 2008.
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Key resource play production
Third quarter oil and natural gas production from key resource plays decreased 7 percent to 3.4 Bcfe/d compared to 3.6 Bcfe/d in the third quarter of 2008. Key resource play oil production was up 20 percent from the third quarter of 2008 to about 81,000 bbls/d led by Foster Creek and Christina Lake. Natural gas key resource play production was down by 10 percent, to 2.9 Bcf/d, due to a decision to shut in some wells, restrict productive capacity and delay some well completions or tie-ins to sales pipelines because of lower natural gas prices. These company-wide initiatives resulted in production restrictions of about 500 MMcf/d in the quarter.
Horn River and Haynesville shale plays continue to deliver strong drilling results
Results from drilling and completion work at EnCana's Horn River play in northeast British Columbia continue to build the company's confidence in the long term potential of this emerging shale gas play, where 47 gross wells have been drilled to date (23.5 net to EnCana). Performance from the first 13 gross wells completed by EnCana and its partner are very positive. Initial 30-day production rates have been between 8 million and 10 million cubic feet of gas per day. At the Haynesville play in northern Louisiana and East Texas, EnCana drilled 12 net wells and production during the quarter averaged about 80 MMcf/d. Well costs have dropped about 40 percent with EnCana's three best wells averaging below $8 million per well.
Integrated oil business production increases
EnCana's integrated oil business with ConocoPhillips achieved a successful third quarter generating operating cash flow of $266 million. Production at Foster Creek and Christina Lake was up 43 percent. Despite the strong production growth, upstream operating cash flow was down 2 percent to $180 million due to a 37 percent decrease in crude oil prices. The Borger and Wood River refineries generated operating cash flow of $86 million compared to a loss of $96 million in the third quarter of 2008. Higher capacity utilization and lower purchased-product and operating costs contributed to the improvement.
Expansion of oil production capacity at Foster Creek and Christina Lake on track
At Foster Creek, oil production from the phase D and E expansions continues to ramp up and the operation is on target to exit 2009 producing between 90,000 and 100,000 bbls/d (45,000 to 50,000 bbls/d net to EnCana). At Christina Lake, construction of phase C continues and current production is about 15,000 bbls/d (7,500 bbls/d net to EnCana).
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Price risk management
Risk management positions at September 30, 2009 are presented in Note 17 to the unaudited Interim Consolidated Financial Statements. In the third quarter of 2009, EnCana's commodity price risk management measures resulted in realized gains of approximately $913 million after tax, including a $916 million after-tax gain on natural gas and basis hedges and a $3 million after-tax loss on other hedges.
As of September 30, EnCana had hedged about 2 Bcf/d, of expected natural gas production for the 2010 gas year, which runs from November 1, 2009 to October 31, 2010, at an average NYMEX equivalent price of $6.08 per Mcf. EnCana also had 27,000 bbls/d of expected 2010 oil production hedged at an average fixed price of WTI $76.89 per bbl. This price hedging strategy increases certainty in cash flow to help EnCana meet its anticipated capital requirements and projected dividends. EnCana continually assesses its hedging needs and the opportunities available prior to establishing its capital program for the upcoming year.
Corporate developments
Split transaction preparation proceeding
Planning is on track to split EnCana into two independent companies: a pure-play natural gas company, EnCana, and an integrated oil company, Cenovus Energy Inc. A shareholders' meeting to vote on the proposed transaction is set for November 25, 2009. Subject to the required shareholder and court approvals being obtained and the satisfaction of conditions, the company expects...
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