Encana Corporation delivered strong financial results and operational performance in the first quarter of 2012 despite further downward pressure on natural gas prices .
Cash flow of US$1.0 billion, or $1.39 per share, was up 6 percent from the first quarter of 2011 supported by the company’s commodity price hedging program, which contributed $358 million in realized after-tax gains, or 49 cents per share. Operating earnings were $240 million, or 33 cents per share, up 10 percent year over year.
Increased liquids production from key resource plays
Encana is aggressively expanding its exploration and development of oil and natural gas liquids (NGLs) throughout the company’s extensive North American asset base, increasing first quarter production 26 percent over the first quarter of 2011 to about 29,000 barrels per day (bbls/d).
“ Over the past year, Encana’s teams have been very successful in advancing multiple oil and liquids-rich natural gas plays towards commerciality. Our tremendous depth and breadth of experience, and focus on highly efficient development programs, have greatly accelerated the speed at which our teams have been able to transition operating expertise from natural gas to oil and natural gas liquids resource plays, ” said Randy Eresman, President & CEO of Encana Corporation.
Financial discipline fortifies balance sheet
Encana has fortified its balance sheet, building a cash position of approximately $2.4 billion as of the end of the first quarter 2012. This healthy financial position was created through an effective commodity hedging program, operational efficiencies, and recent dispositions and joint venture transactions, including:
– the disposition of Cutbank Ridge natural gas processing assets (C$920 million);
– the Cutbank Ridge Partnership with Mitsubishi Corporation (C$2.9 billion);
– a joint earning agreement with Exaro Energy III LLC in the Jonah field ($380 million); and
– an agreement with a subsidiary of Toyota Tsusho for coalbed methane development in Alberta (C$600 million).
Encana is currently targeting to have approximately $3 billion in cash and cash equivalents on its balance sheet by the end of 2012. This target will be reviewed throughout the year and is dependant on a number of factors including commodity prices, success of the company’s oil and natural gas liquids program, and additional potential joint ventures or asset divestitures.
“We continue to seek and develop partnership opportunities for the exploration and development of oil and liquids-rich assets throughout our land base, and for dry natural gas plays that could be linked to liquefied natural gas (LNG) projects,” Eresman said. “Our target is to maintain financial strength and flexibility by balancing capital investment with cash flow. By accelerating investment in prospective oil and liquids-rich natural gas plays we expect to diversify our commodity mix and sources of cash flow. ”
In well-delineated, low-cost, operationally efficient assets, the company uses third-party capital to accelerate value recognition while significantly reducing its capital requirements. In early-life plays these arrangements reduce Encana’s capital risk and accelerate evaluation and potential commercialization of the assets. Additionally, third-party capital is often employed in more mature assets to maintain an activity level that preserves capital and operational efficiencies.
Commitment to reduced pace of natural gas production
Natural gas production was approximately 3.27 billion cubic feet per day (Bcf/d), 2 percent higher than the first quarter of 2011 and 5 percent lower than the fourth quarter of 2011. Encana is targeting capacity reductions totalling approximately 600 million cubic feet per day (MMcf/d) gross before royalties compared to 2011. Half of this reduction is attributable to declining production through a reduced capital program and the other half is attributable to physical shut-ins or otherwise curtailed volumes. There is a current weakness in market fundamentals due to an oversupply of natural gas and it is clear that a continued reduction of drilling activity will be required to restore market balance.
Recent developments cause for optimism
Despite the current weakness in North American natural gas market fundamentals, recent industry developments and announcements related to the increased use of natural gas and potential future LNG export projects may also contribute to a price correction.
Over the past five to six months, lower natural gas prices have resulted in 7 Bcf/d of fuel switching from coal to natural gas for electrical generation in North America.
Encana and its partners continue to advance negotiations related to the planned Kitimat LNG export terminal with potential off-take customers and are expecting to reach a final investment decision by year-end.
“We continue to see cause for optimism for higher natural gas prices in the approval of natural gas exports and export facilities, coal plant retirements, increased industrial demand for ethane and other NGLs, and gas-to-liquids projects, ” Eresman said.
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LNG World News Staff, April 25, 2012; Image: Encana