EnCana Corporation plans capital expenditures of about US$6.9 billion in 2008, up about 13 percent from 2007. The company remains focused on growing its key resource plays, with increased investment aimed at production growth from U.S. natural gas and longer lead time projects such as Canadian oilsands, expanded downstream refining capacity and the advancement of the Deep Panuke natural gas project offshore Nova Scotia. Investments in Alberta natural gas projects and new oilsands delineation work have been reduced to reflect the recent erosion of economic returns.
Free cash flow of about $1.5 billion, dividend to double in 2008
EnCana expects to fund its capital investment with internally generated cash flow, which is underpinned by natural gas hedges, at an average price of about $8.20 per thousand cubic feet, on about 47 percent of its forecasted gas production from January to the end of October 2008. The company expects 2008 cash flow will exceed capital expenditures resulting in free cash flow of approximately $1.5 billion, which is about 18 percent of estimated cash flow (based on the midpoint of cash flow guidance). EnCana also expects to generate an estimated $500 million from divestitures in 2008. With a continued focus on a moderate, sustainable pace of growth and capital discipline, EnCana plans to continue returning free cash flow to shareholders through an ongoing program of dividends and share purchases. Consistent with the company's focus on shareholder value creation, EnCana plans to double its dividend in 2008. Board approval of the planned increase in 2008 would result in an annual dividend of $1.60 per share, increasing the yield to about 2.4 percent at the current share price. The company also expects to purchase about 2 percent of its shares in 2008 under its Normal Course Issuer Bid program.
"In recent years, we have redesigned the company to focus on our core strength - North American unconventional resource development. It's what we do best and our resource play strategy is working very well. Our core business strategy is steadfast. We capture large, early-life resource plays; we rigorously seek technical and commercial solutions to enhance their value; we use a manufacturing approach to development and target a sustainable level of production growth of about 5 percent a year. We maintain a strong balance sheet, which gives us the flexibility to high-grade our portfolio through both acquisitions and divestitures when the market presents the opportunity. Through the entire process, we manage operational, financial and reputational risks. The strength, stability and profitability of our business model is clearly demonstrating industry-leading performance in developing unconventional natural gas and in-situ oilsands," said Randy Eresman, EnCana's President & Chief Executive Officer.
EnCana expects to grow 2008 natural gas production by about 7 percent, while oil and natural gas liquids production is expected to decrease slightly, resulting in a total production increase of about 5 percent to about 4.6 billion cubic feet equivalent per day. On a per share basis, gas production is expected to increase about 8 percent, while total production is forecast to increase about 7 percent per share.
"The strength and diversification of our portfolio reduces our risk and gives us opportunities for direct investment in the most attractive return projects, which is what we plan to continue to do in 2008. With the geological and economic success in our unconventional gas fields in Wyoming and Texas, we are substantially increasing investment in our U.S. natural gas production, which is expected to grow by about 25 percent this year. Our gas growth is largely driven by our leading-return projects - Jonah in Wyoming and the Amoruso Field in East Texas, where a planned investment increase of about 65 percent, to more than $1 billion, is expected to boost production more than 45 percent," Eresman said.
Integrated oilsands investment up close to double, investment in Deep Panuke ramps up
EnCana will approximately double its investment in integrated oilsands to about $1.2 billion in 2008, split about evenly between growing upstream production and expanding downstream heavy oil processing capacity. EnCana's integrated oilsands production is expected to grow about 25 percent in 2008 to about 34,000 barrels per day. Downstream investment is focused on a long-term refinery expansion (subject to regulatory approval) to add 65,000 bbls/d (gross) of coking capacity and 55,000 bbls/d (gross) of refining capacity at the ConocoPhillips-EnCana Wood River refinery in Illinois. Off Canada's East Coast, EnCana plans to invest about $40 million in 2008 on the Deep Panuke gas development, which is expected to produce first gas in late 2010.
A large change in the Canada-U.S. dollar exchange rate, increased labour rates, higher energy costs and significant increases in property taxes have made some of EnCana's Alberta-based projects less economic, as compared to previous years and relative to the rest of its portfolio. In addition, the planned Alberta royalty increases starting in 2009 have significantly diminished returns for deep gas well drilling and new and emerging resource plays. Compared to EnCana's preliminary capital investment plan for 2008, increases in Alberta royalties have resulted in a reduction of about $500 million of EnCana's Alberta investment next year. Taking all these factors into consideration, EnCana's Alberta drilling for shallow gas, deep gas, coalbed methane and its delineation drilling of new oilsands plays will be lower than in previous years. Investment in British Columbia in 2008 is expected to be about the same as in 2007. In Canada excluding Integrated Oilsands, about $3.0 billion is planned for upstream investment, about 10 percent lower than in 2007.
Capital inflation rate moderates; operating costs continue to rise
With the expected slowdown of non-oilsands industry activity levels in Canada, capital inflation is expected to be very low in 2008. In the U.S., where activity remains robust, the company expects inflation of about 5 percent as service capacity has expanded to meet demands. Canadian oilsands inflation is expected to be between 5 and 10 percent, reflecting high activity levels. Operating costs, however, continue to rise due to increased labour and energy costs and property taxes, offset by lower service sector costs. Operating costs on a per-unit basis, excluding the impact of foreign exchange, are expected to increase by about 10 percent year over year.
Expecting competitive 2007 finding and development costs
Despite these rising cost structures, EnCana's resource play assets and strategies will continue to help ensure that its capital and operating cost efficiencies are amongst the best in the industry. For 2007, the company expects its finding and development costs, before any adjustments due to year-end prices, to be very competitive.
Gas production to increase 7 percent in 2008
Natural gas production, which represents more than 80 percent of EnCana's production, is expected to increase about 7 percent, while oil and natural gas liquids (NGLs) production (excluding volumes from Integrated Oilsands) is expected to decrease about 8 percent, mostly due to natural decline in mature properties. EnCana's total production is expected to increase about 5 percent in 2008.
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