OilVoice - EnCana Generates Third Quarter Cash Flow of US$2.8 billion

EnCana Generates Third Quarter Cash Flow of US$2.8 billion

Thursday, October 23, 2008

- Operating earnings up 40 percent to $1.92 per share or $1.4 billion
- Total natural gas and oil production increases 6 percent

EnCana Corporation generated strong increases in cash flow and operating earnings in the third quarter of 2008 as a result of solid production growth and higher commodity prices compared to the same period in 2007. Third quarter natural gas and oil production increased 6 percent, led by a 16 percent rise in production from key natural gas resource plays.

"These strong financial results in the third quarter are a reflection of the company's focus on operating excellence and capital discipline. EnCana's prudent financial approach and low-risk business model allow us to capture the upside during times of higher commodity prices as well as sustain us through a volatile natural gas and oil pricing environment," said Randy Eresman, EnCana's President & Chief Executive Officer.

"In this period of economic uncertainty, our resource play strategy maintains a steadfast focus on low-cost production. As part of our ongoing efforts to maintain financial resilience and flexibility, we will continue to take steps to reduce pricing risk through our natural gas price hedging program. The company also maintains financial strength with a conservative and prudent approach that mitigates risks associated with borrowing. About 78 percent of EnCana's outstanding debt is comprised of long-term, fixed-rate debt with an average remaining term of more than 14 years," Eresman said.

EnCana increases gas price hedges

Over the next year, EnCana has a substantial portion of expected future production hedged at strong prices. About 80 percent of EnCana's total current production is natural gas. For the 2009 gas year, which runs from November 2008 through October 2009, EnCana has about 2.5 billion cubic feet per day (Bcf/d) - about 60 percent of current production - hedged at an average price of $9.15 per thousand cubic feet (Mcf).

Third Quarter 2008 Highlights (all year-over-year comparisons are to the third quarter of 2007)

Financial - US$
- Cash flow increased 28 percent per share to $3.74, or $2.8 billion
- Operating earnings increased 40 percent per share to $1.92, or $1.4 billion
- Net earnings increased to $3.55 billion, primarily due to after-tax unrealized mark-to-market gains on risk management activities of $2.0 billion in 2008 compared with losses of $69 million in 2007
- Operating cash flow from the Integrated Oil division was $139 million, down 70 percent
- Capital investment, excluding acquisitions and divestitures, was in line with guidance at $1.6 billion, up 1 percent over 2007
- Free cash flow increased $578 million to $1.2 billion
- Realized natural gas prices increased 18 percent to $7.94 per Mcf and realized oil and natural gas liquids (NGLS) prices were up 85 percent to $90.88 per barrel (bbl). These prices include the impact of financial hedges
- Net debt to capitalization ratio of 26 percent
- Net debt to adjusted EBITDA of 0.6 times.

Operating - Upstream
- Total natural gas, oil and NGLs production increased 6 percent to 4.7 Bcfe/d
- Production from key natural gas resource plays increased 16 percent
- Total natural gas production increased 8 percent to 3.9 Bcf/d
- Total oil and NGLs production was approximately 133,600 barrels per day (bbls/d), down about 2 percent
- Production from Foster Creek and Christina Lake increased 10 percent to approximately 63,000 bbls/d (31,500 bbls/d net to EnCana)
- Operating and administrative costs of 79 cents per thousand cubic feet equivalent (Mcfe) decreased 22 percent from $1.01 a year earlier, largely due to mark-to-market accounting in the valuation of the cost of long-term incentives.

Operating - Downstream
- Refined products averaged 438,000 bbls/d (219,000 bbls/d net to EnCana), down 10 percent
- Refinery crude utilization of 91 percent or 412,000 bbls/d crude throughput (206,000 bbls/d net to EnCana), down 10 percent from the third quarter of 2007 due primarily to unplanned refinery outages and maintenance activities at Wood River
- The Wood River Coker and Refinery Expansion (CORE) project received regulatory approvals and construction is expected to be completed over the next three years at a cost of $3.6 billion ($1.8 billion net to EnCana).

Majority of net earnings year-over-year increase related to unrealized mark-to-market accounting gains

EnCana's net earnings in the third quarter increased to $3.55 billion. Approximately $2.0 billion of this increase was an after-tax unrealized gain due to mark-to-market accounting for hedging contracts. This large gain in net earnings resulted from a large decrease in commodity prices during the third quarter. The gain essentially reversed unrealized mark-to-market losses that were included in net earnings earlier in the year when natural gas prices were rising. It is because of these dramatic mark-to-market accounting swings in net earnings that EnCana focuses on operating earnings as a better measure of quarter-over-quarter earnings performance. Operating earnings in the third quarter, which do not include mark-to-market accounting for unrealized gains and losses, were up about 40 percent, which reflects the stronger realized prices - up about 31 percent - in the third quarter of 2008 compared to 2007, plus EnCana's 6 percent increase in daily production.

Guidance for total cash flow narrowed to range of $10 billion to $10.4 billion

Based on the company's natural gas production and commodity price expectations for the remainder of the year, EnCana is narrowing its 2008 guidance for total cash flow to a range of $10 billion to $10.4 billion, or between $13.30 and $13.85 per share. Operating cash flow has been revised to between $11.9 billion and $12.7 billion. Capital investment, including acquisitions, was ahead of expectations at the end of the third quarter mostly due to additional unconventional natural gas land acquisitions in Haynesville in Louisiana and Montney in British Columbia. EnCana had expected to complete a number of divestitures in the fourth quarter to offset these acquisitions. However, as a result of the current economic climate, some of those transactions may not be completed prior to year end. Based on current expectations, net acquisition and divestiture capital investment guidance has increased $900 million. In total, capital expenditures for the year, including acquisitions and divestitures, are expected to be about $7.4 billion, compared to $6.5 billion provided in previous guidance. Total natural gas, oil and NGLs production is on track to meet full-year guidance of 4.64 MMcfe/d.

Production from key natural gas resource plays up 16 percent in third quarter

Natural gas production increased 8 percent or 287 MMcf/d in the third quarter of 2008 compared with the third quarter of 2007, largely due to a 16 percent increase in production from EnCana's key natural gas resource plays. The application of new technology helped reduce costs for many of the company's key resource plays, resulting in improved well performance and continued efficiency gains. Production increases were led by a rise of 135 percent at East Texas, where production averaged about 340 MMcf/d in the third quarter, mainly due to new wells coming on production and the doubling of EnCana's interest in Deep Bossier in late 2007. Drilling and operational success at Fort Worth, Piceance and Jonah also contributed to the third quarter natural gas production increase of 24 percent in key resource plays in the U.S. Gas production from the Canadian Foothills division key resource plays increased 19 percent in 2008 compared with 2007. Drilling success and new facilities in the key resource plays of Coalbed Methane (CBM), Cutbank Ridge and Bighorn increased production by 23 percent, which was partially offset by natural declines from conventional properties.

Integrated Oil division getting set for production increase

Integrated Oil generated $139 million in operating cash flow, down 70 percent from $468 million in the same quarter of 2007. Foster Creek and Christina Lake operations contributed $183 million, a 190 percent increase due to strong heavy oil prices. Operating cash flow includes a $96 million operating loss from the downstream business, a decrease of 128 percent due to weaker market crack spreads, unplanned refinery outages and hurricane-related crude oil supply disruptions. Downstream operating cash flow includes a decrease of $95 million due to higher purchased product costs as a result of processing higher-priced crude during the quarter. The Chicago 3-2-1 crack spread averaged $17.29 per bbl in the quarter, down 6 percent from $18.48 per bbl, in the same period last year.

"Expansion activity is progressing as scheduled at our integrated oil facilities. Foster Creek is currently producing about 56,000 bbls/d (28,000 bbls/d net to EnCana). Steaming of the reservoir is underway as we near completion of the next two expansion phases, which are expected to double production capacity at Foster Creek to about 120,000 bbls/d in 2009. Christina Lake is now producing 12,000 bbls/d (6,000 bbls/d net to EnCana) and the most recent expansion at the facility has increased production capacity to 18,000 bbls/d," Eresman said.

Wood River refinery expansion receives regulatory approvals

EnCana announced on September 24, 2008 that construction of the CORE project would begin at the Wood River refinery in Roxana, Illinois. The project, a 50-50 venture of EnCana and the refinery operator ConocoPhillips, is expected to increase total crude oil refining capacity by 50,000 bbls/d to 356,000 bbls/d, more than double current heavy crude refining capacity to 240,000 bbls/d as well as increase clean product yield by 10 percent to approximately 89 percent. The CORE project is estimated to cost about $3.6 billion ($1.8 billion net to EnCana) and is expected to be completed over the next three years.

Shale gas plays continue to show promise

"In the third quarter of 2008, we strengthened our position in the Haynesville gas resource play by acquiring 25,000 net acres, increasing our land position to about 400,000 net acres, plus 63,000 net acres of mineral rights. We continue to see great potential in this promising shale play," Eresman said. "EnCana, along with our partner, Shell Exploration & Production, has an industry-leading land position in this area of Louisiana. We currently have six rigs running with a focus on cost reduction and completion optimization. We will target drilling and completing the first well in the mid-Bossier shale in the fourth quarter. In northeast British Columbia and northwestern Alberta, our already strong land position in the Montney play has expanded to more than 700,000 acres. With that, EnCana has the largest disclosed land base in this emerging unconventional gas field. And, at Horn River in British Columbia, EnCana and partner Apache Corporation have completed seven wells this year, with one of our most recent wells delivering encouraging results, flowing for the first 30 days at an average of almost 8 MMcf/d."

EnCana increases ownership in Deep Panuke

In August 2008, EnCana acquired additional interests in one of the licenses making up the Deep Panuke natural gas field offshore Nova Scotia. EnCana now owns substantially all of the Deep Panuke field. The $700 million Deep Panuke project is on budget and on schedule to begin producing first gas in late 2010.

Weak U.S. Rockies gas prices prompt production shut-in at Jonah

Due to lower natural gas prices in the U.S. Rockies region, EnCana has shut in approximately 50 MMcf/d of production (net of royalties) at the company's Jonah key resource play in Wyoming. Although EnCana hedged 100 percent of expected production from the Rockies region, production levels have been higher than anticipated, creating a small exposure to Rockies spot prices. As a result, EnCana has decided to limit production at Jonah to 580 MMcf/d (net of royalties) for October. If prices improve, EnCana will re-evaluate a return to productive capacity. Also, during September, a testing outage of the Rockies Express Pipeline resulted in lower gas prices in the U.S. Rockies region, prompting EnCana to shut-in approximately 60 MMcf/d (5 MMcf/d annualized).