- Second quarter natural gas production up 10 percent to 3.8 billion cubic feet per day
- Strong outlook for gas production growth and prices triggers increase to
EnCana Corporation achieved strong increases in cash flow and operating earnings in the second quarter of 2008 as a result of solid performance from the company's North American portfolio of resource plays and substantial increases in commodity prices.
"Once again our strong operating results demonstrate the substantial value-creation capacity of our resource play strategy. Second quarter cash flow per share and operating earnings per share increased 16 and 9 percent respectively over last year while natural gas production is ahead of expectations. Led by the East Texas, Jonah, Bighorn and Alberta coalbed methane (CBM) resource plays, our low-risk portfolio of unconventional resources continues to deliver sustainable growth across North America. In the second quarter, the upstream business of our Integrated Oil division, in particular, benefited from significantly higher field prices," said Randy Eresman, EnCana's President & Chief Executive Officer.
EnCana expanding investments in North American resource portfolio
"With natural gas production growing faster than forecast and stronger than expected prices, we are raising our 2008 cash flow forecast to a range of $10 billion to $11 billion from a current level of $9.6 billion to $10 billion. Our full-year gas production forecast is also increasing to an expected average of 3.85 Bcf/d. We are directing the higher than originally forecast cash flows into growing our already strong position in the Haynesville Shale in Louisiana, where recent test wells are demonstrating very strong potential. At the same time, we are stepping up our divestiture program for the remainder of the year to offset the additional costs of expanding shale gas lands and resources," Eresman said.
Shale plays continue to show promise
"In the second quarter we announced an expansion of our sizeable position in British Columbia's Horn River and Louisiana's Haynesville natural gas shale plays. At Horn River, two of our recently completed wells are producing at a very strong first-month average rate in excess of 5 million cubic feet per day (MMcf/d). At Haynesville, during a two-day test, the initial flow rate of a second horizontal well was 15 MMcf/d. These well results are exceptional and are a strong indication that the addition of these plays has the potential to accelerate the pace of our natural gas growth," Eresman said.
Integrated Oil production growth set to ramp up
"At Foster Creek, first production from our newest expansion phase, which will add 30,000 bbls/d of gross production capacity, is expected to start ramping up in the fourth quarter 2008. The next 30,000 bbls/d phase is expected to be completed in the first quarter of 2009. Combined, these two phases are scheduled to double our gross production capacity at Foster Creek to 120,000 bbls/d. Production is forecast to begin ramping up later this year and continue through 2009. At Christina Lake, we are steaming wells in our recently completed expansion, which is expected to increase our gross production capacity to 18,000 bbls/d by the end of the year, with production ramping up through 2009," Eresman said.
"Plans for splitting EnCana into two strong independent companies focused on distinct businesses - unconventional natural gas (GasCo) and integrated oil (IOCo) - are proceeding well and we are working towards completing the transaction early in 2009," Eresman said.
Second Quarter 2008 Highlights
(all year-over-year comparisons are to the second quarter of 2007)
Financial
Cash flow increased 16 percent per share to $3.85, or $2.9 billion
• Operating earnings were up 9 percent per share to $1.96, or $1.5 billion
• Net earnings were down 14 percent per share to $1.63, or $1.2 billion, primarily due to unrealized mark-to-market gains of $47 million after-tax in 2007
• Operating cash flow generated from the Integrated Oil division totalled $527 million, comprised of $185 million from the upstream operations, a 59 percent increase due to strong field prices, and $342 million from the downstream business, a decrease of 22 percent due to weaker refining margins
• Capital investment was in line with guidance at $1.7 billion, up about 47 percent in large part due to continued development of East Texas and other key resource plays, as well as the expansion of the company's upstream and downstream integrated oil capacity
• Free cash flow decreased $206 million to $1.2 billion
• Realized natural gas prices were up 12 percent to $8.54 per thousand cubic feet (Mcf) and realized liquids prices increased 99 percent to $90.47 per barrel (bbl). These prices include the impact of financial hedges
• EnCana purchased approximately 200,000 common shares at an average share price of $74.81 under the Normal Course Issuer Bid, for a total cost of $15 million.
Operating - Upstream
• Key resource play production was up 14 percent, with a 17 percent increase in natural gas production and oil production down 9 percent
• Total natural gas production increased 10 percent to 3.8 billion cubic feet per day (Bcf/d), up 11 percent per share
• Total oil and natural gas liquids (NGLs) production decreased 4 percent to approximately 128,000 barrels per day (bbls/d), down 3 percent per share
• Oil production at Foster Creek and Christina Lake was down 12 percent to approximately 24,700 bbls/d (net to EnCana) due to an extended turnaround in the second quarter at Foster Creek. Current net production is about 30,000 bbls/d
• Operating and administrative costs of $1.71 per thousand cubic feet equivalent (Mcfe) increased 46 percent from $1.17 per Mcfe one year earlier. More than half of the increase was due to long-term incentive costs and an appreciation of the Canadian dollar compared to the U.S. dollar. When those items are factored out, operating and administrative costs were in line with guidance of $1.40 per Mcfe. The rest of the increase was due to reorganization costs, increased activity levels and other administrative costs.
Operating - Downstream
• Refined products averaged 464,000 bbls/d (232,000 bbls/d net to EnCana), up 10 percent
• Refinery crude utilization of 97 percent or 437,000 bbls/d crude throughput (218,500 bbls/d net to EnCana), up 10 percent, from the second quarter of 2007, due to a major turnaround and new coker startup at the Borger refinery in June, 2007.
Guidance for total cash flow increases to a range of $10 billion to $11 billion
Based on the company's strong cash flow performance to date and natural gas production and commodity price expectations for the remainder of the year, EnCana is increasing its 2008 guidance for total cash flow to a range of $10 billion to $11 billion, or between $13.30 and $14.65 per share. EnCana is also increasing its natural gas production forecast by 70 MMcf/d to 3.85 Bcf/d, or 8 percent higher than 2007 gas production. Key gas resource play production in 2008 is now expected to average 3.14 Bcf/d, up 60 MMcf/d. Production from the company's Foster Creek and Christina Lake projects is now expected to average about 31,000 bbls/d, down about 3,000 bbls/d due to an unexpected power outage and an extended plant turnaround in the second quarter at Foster Creek. As well, the company is planning a more ambitious divestiture program. Proceeds from planned asset sales are expected to offset additional land purchases in 2008, resulting in net proceeds from acquisitions and divestitures of $500 million, which is in line with guidance.
Managing costs through long-term drilling contracts
"As a result of higher commodity prices and increased activity, we are seeing signs of cost inflation in services and materials - particularly for steel and fuels, and we believe inflationary pressure may continue to climb the rest of the year. EnCana has largely managed to offset inflationary pressures to date through a series of long-term contracts. For example, we have been working to lock in longer-term contracts for our well fracturing services. The majority of these contracts are priced at current levels. Significant portions of our steel requirements were contracted early so that we have the benefit of those more favourable cost levels. Going forward, we will continue to pursue cost management opportunities when possible," Eresman said.
Key resource play natural gas production up 17 percent in second quarter
Total natural gas production increased 10 percent in the second quarter to 3.8 Bcf/d, driven by a 17 percent increase in EnCana's natural gas key resource plays to 3.15 Bcf/d. In the U.S. increases were led by East Texas at 127 percent as a result of drilling success as well as incremental volumes from the Deep Bossier acquisition. In the Canadian Foothills natural gas production was up 5 percent, with drilling success and new facilities in the key resource plays of Bighorn in west central Alberta, CBM in central Alberta and Cutbank Ridge straddling the British Columbia-Alberta boundary.
Integrated Oil benefits from higher oil prices
Integrated Oil generated $527 million in operating cash flow, down slightly from $557 million in the same quarter of 2007. The upstream business benefited from a 138 percent increase in the average heavy oil price to $93.64 per bbl at Foster Creek and Christina Lake. Operating cash flow from the downstream business was impacted by significantly weaker refining margins. Operating cash flow for the second quarter includes $172 million related to
lower purchased product costs as a result of accounting for inventory based on a first-in first-out valuation which is required under Canadian generally accepted accounting principles. This inventory valuation methodology results in lower product charges to operations in a rising input cost environment. The Chicago 3-2-1 crack spread averaged $13.60 per bbl in the quarter, down 55 percent from $30.12 per bbl from the same period last year when crack spreads reached record levels as gasoline inventories were drawn down to five-year lows. The weaker refining margins were offset by the higher upstream pricing, which demonstrates the benefit of the company's integration strategy. Second quarter oil production at Foster Creek and Christina Lake was down 12 percent to about 24,700 bbls/d (net to EnCana), primarily due to an extended scheduled turnaround at Foster Creek. Current net production is approximately 30,000 bbls/d.
IMPORTANT NOTE: Effective January 2, 2007, EnCana established an integrated oil business with ConocoPhillips, which resulted in EnCana contributing its interests in Foster Creek and Christina Lake into an upstream partnership owned 50-50 by the two companies. Production and wells drilled from 2006 have been adjusted on a pro forma basis to reflect the integrated oil transaction. Per share amounts for cash flow and earnings are on a diluted basis. EnCana reports in U.S. dollars unless otherwise noted and follows U.S. protocols, which report 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).
