EnCana Corporation achieved solid increases in 2008 cash flow and operating earnings as a result of strong growth in natural gas and oil production and higher prices. Financial results were enhanced in the fourth quarter by EnCana's favourable natural gas price hedges. Again in 2008, EnCana achieved strong year-over-year proved reserves additions.
"Despite the unprecedented volatility in oil and natural gas prices and a challenging operating environment in 2008, EnCana delivered strong operational and financial performance. We met or exceeded all of our targets, including those for cash flow, production and capital investment. Overall production grew 6 percent, driven by our key resource plays which increased 13 percent year-over-year. We added reserves of 2.5 trillion cubic feet of gas equivalent, replacing 150 percent of production at a very competitive finding and development cost of US$2.50 per thousand cubic feet of gas equivalent," said Randy Eresman, EnCana's President & Chief Executive Officer.
"EnCana is pursuing a conservative and prudent capital program in 2009 and we have built flexibility into our plans to adjust investment depending on how the year unfolds. With widespread economic uncertainty, we remain intently focused on our core business objectives: maintaining financial strength, generating significant free cash flow, further optimizing our capital investments and continuing to pay a stable dividend to shareholders - currently $1.60 per share annualized, which at the current share price results in a yield of about 3.7 percent.
"Natural gas and oil prices are expected to remain low at least through the first quarter of 2009. While we have seen some indication of a softening in service and supply costs, reductions are likely to be more pronounced in the latter half of 2009. We are affirming our 2009 corporate guidance. Our cash flow forecast for the year is underpinned by strong hedges - about two- thirds of expected natural gas production hedged through October 2009 at an average price of $9.13 per thousand cubic feet, well above the current spot price. In addition, we are continually seeking new ways to strengthen our financial position, including cost-reduction initiatives, project reviews throughout the year and exploring and implementing operational efficiencies across our company.
"EnCana's low-risk, low-cost resource play business model provides financial resilience and positions the company very well for dealing with the economic downturn. We can apply an even higher level of scrutiny and fine tune investments in order to target optimal project returns and long-term value creation," Eresman said.
Effective January 2, 2007, EnCana established an integrated oil business with ConocoPhillips, which resulted in EnCana contributing its interests in Foster Creek and Christina Lake into an upstream partnership owned 50-50 by the two companies. Production and wells drilled in 2006 have been adjusted on a pro-forma basis to reflect the integrated oil transaction. Unless otherwise noted in this news release, EnCana's proved reserves and production for 2007 and 2008 are reported on a post integrated oil basis. Per share amounts for cash flow and earnings are on a diluted basis. EnCana reports in U.S. dollars unless otherwise noted and follows U.S. protocols, which report production, sales and reserves on an after-royalties basis. The company's financial statements are prepared in accordance with Canadian generally accepted accounting principles (GAAP).
2008 Highlights
Financial - US$
• Cash flow increased 13 percent per share to $12.48, or $9.4 billion
• Operating earnings were up 9 percent per share to $5.86, or $4.4 billion
• Net earnings were up 53 percent per share to $7.91, or $5.9 billion, primarily due to an after-tax unrealized mark-to-market hedging gain of $1.8 billion in 2008 compared to an after-tax loss of $811 million in 2007.
• Capital investment, excluding acquisitions and divestitures, was up 17 percent to $7.1 billion
• Generated $2.3 billion of free cash flow, down $112 million from 2007
• Operating cash flow nearly doubled to $421 million from the company's Foster Creek and Christina Lake upstream projects, whereas lower refining margins and higher purchased product costs resulted in a $241 million loss in operating cash flow for the downstream business. As a result, EnCana's integrated oil business venture with ConocoPhillips generated $180 million of operating cash flow
• Purchased approximately 4.8 million EnCana shares at an average price of $67.13 under the Normal Course Issuer Bid, for a total cost of approximately $326 million
• Doubled quarterly dividend to 40 cents per share in March 2008, or $1.60 per share on an annualized basis
• At year end, debt to capitalization was 28 percent and debt to adjusted EBITDA was 0.7 times
Operating - Upstream
• Natural gas production increased 8 percent to 3.8 billion cubic feet per day (Bcf/d), up 9 percent per share
• Increased production from natural gas key resource plays by 14 percent
• Oil and natural gas liquids (NGLs) production was relatively flat at about 134,000 barrels per day (bbls/d)
• Integrated oil production grew 13 percent to 30,183 bbls/d at Foster Creek and Christina Lake
• Operating and administrative costs of $1.25 per thousand cubic feet equivalent (Mcfe), compared to $1.17 per Mcfe in 2007
Operating - Downstream
• Refined products averaged 448,000 bbls/d (224,000 bbls/d net to EnCana)
• Refinery crude utilization of 93 percent or 423,000 bbls/d crude throughput (211,500 bbls/d net to EnCana)
Reserves
• Total proved reserves increased 5 percent to 19.7 trillion cubic feet of gas equivalent (Tcfe)
• Added 2.5 Tcfe of proved reserves, compared to production of 1.7 Tcfe, for a production replacement of 150 percent
• Proved natural gas reserves increased 3 percent to 13.7 trillion cubic feet (Tcf)
• Proved oil and NGLs reserves increased 8 percent to 1.0 billion barrels
• Proved reserves additions, excluding acquisitions and divestitures, included approximately 1.9 Tcf of natural gas reserves and 130 million bbls of oil and NGLs reserves
• Finding and development (F&D) costs were $2.50 per Mcfe
• Three-year (2006-2008) F&D costs averaged $2.02 per Mcfe
• F&D costs for natural gas and associated liquids were approximately $2.90 per Mcfe
• Proved reserves life index of approximately 12 years
• Reserves replacement costs are outlined on page 7
Strategic developments
• Acquired additional land and mineral interests in the Haynesville Shale play in Louisiana and Texas for approximately $1.0 billion
• Began construction of a Coker and Refinery Expansion (CORE) project at the Wood River refinery in Roxana, Illinois that is expected to expand heavy oil processing capacity and increase production of clean transportation fuels for the U.S. Midwest market
• Signed a contract for the design and construction of the Production Field Centre for the Deep Panuke natural gas project offshore Nova Scotia
• Divested mature conventional oil and natural gas assets in North America for approximately $698 million as well as interests in Brazil for approximately $164 million, before closing adjustments
Production
EnCana's fourth quarter natural gas production increased 4 percent to 3.9 Bcf/d, compared to the same quarter in 2007. Oil and natural gas liquids production in the quarter was flat at 136,000 bbls/d. Total production increased 3 percent to 4.7 Bcfe/d. Fourth quarter cash flow per share decreased 32 percent to $1.73, or $1.3 billion, and operating earnings per share decreased 46 percent to $0.60, or $449 million, largely due to a 30 percent drop in heavy oil prices and a 31 percent decrease in the Chicago 3-2-1 crack spread.
Natural gas production averaged about 3.8 Bcf/d in 2008, an increase of 8 percent from 2007. Natural gas key resource play production increased 14 percent in 2008 compared with 2007. EnCana's production growth was led by a 21 percent increase in gas production in the U.S. mainly from East Texas, which continues to benefit from drilling and operational successes and the incremental volumes from Deep Bossier, where the company doubled its interest in late 2007. In Canada, production remained flat as increases from drilling successes in Bighorn, coalbed methane (CBM) and Cutbank Ridge offset natural declines. Total production growth more than offset a production decrease, on an annualized basis, of about 40 million cubic feet per day (MMcf/d) due to freeze-offs, pipeline outages, shut-ins and hurricanes. Production is expected to remain essentially flat in 2009.
2008 proved reserves
In 2008, total proved reserves increased 5 percent to 19.7 Tcfe at an average F&D cost of $2.50 per Mcfe. EnCana added 2.5 Tcfe of proved reserves, compared to production of 1.7 Tcfe, resulting in a reserve replacement of 150 percent of 2008 production. Cutbank Ridge, Bighorn and East Texas resource plays contributed to proved reserves additions of 1.9 Tcf of natural gas. Proved reserves of 387 Bcf were added for the Deep Panuke natural gas project, for which development is well underway and first production is expected in late 2010. About 130 million bbls of oil and NGLs were added, about two-thirds at Foster Creek and Christina Lake, where there were positive reserves revisions. Despite the low-price environment at year end, these projects had no reserves writedowns, which reflects the quality of the underlying reservoirs and EnCana's strong operating performance. EnCana's thermal oil projects have about 670 million bbls of proved reserves, of which about 80 percent is undeveloped.
F&D costs for natural gas and associated liquids were approximately $2.90 per Mcfe. When the cost of acquiring non-developed land in 2008 is excluded from the calculation, F&D costs averaged $2.45 per Mcfe. Natural gas and associated liquids reserves additions were approximately 2.0 Tcfe with capital investments of $5.8 billion in 2008, compared to 2007 reserves additions of about 2.0 Tcfe with capital investments of $4.7 billion. In 2008, F&D costs for crude oil were approximately $8.35 per bbl, up from about $3.60 per bbl in 2007. Crude oil reserves additions were approximately 123 million bbls and capital investments were $1 billion in 2008, compared to 2007 reserves additions of about 233 million bbls and capital investments of $840 million.
Three-year F&D averages $2.02 per Mcfe
For the three years 2006-2008, EnCana's F&D costs averaged $2.02 per Mcfe. For natural gas and associated liquids, F&D costs averaged $2.65 per Mcfe based on reserves additions of about 5.8 Tcfe and capital investments of $15.6 billion. For the same period, F&D costs for crude oil averaged $5.30 per bbl based on reserves additions of about 555 million bbls and capital investments of $2.9 billion.
Reserves replacement cost in 2008
Reserves replacement cost for 2008 was approximately $2.60 per Mcfe, which includes divestitures of 222 Bcfe for proceeds of $800 million. EnCana's three-year (2006-2008) reserves replacement cost was approximately $2.55 per
Mcfe.
Integrated Oil Division
EnCana's Integrated Oil Division, which includes the company's integrated oil business venture with ConocoPhillips and production from Athabasca and Senlac, generated $375 million in operating cash flow, down 75 percent, from 2007. EnCana saw strong financial performance from its Foster Creek and Christina Lake operations, which benefited from higher heavy oil prices, up about 60 percent, and a 13 percent increase in production to 30,183 bbls/d. Operating cash flow for Foster Creek and Christina Lake nearly doubled to $421 million in 2008 compared to $213 million in 2007. The downstream operations reported a loss of $241 million in operating cash flow, a $1.3 billion decrease compared to 2007, a year with record crack spreads. Downstream operating cash flow was reduced as a result of lower refining margins and higher purchased product costs during the second half of 2008. The Wood River and Borger refineries are located in markets influenced by U.S. Mid-Continent and Chicago 3-2-1 crack spreads. In 2008 the Chicago 3-2-1 crack spread decreased 37 percent to $11.22 per bbl compared to $17.67 per bbl in 2007. The weaker refining margins were offset, somewhat, by the higher upstream pricing, which demonstrates the benefit of the company's integration strategy.
At Foster Creek steaming of Phase 1D and 1E has started and construction is nearing completion. A ramp up of production is expected to begin at the end of the first quarter in 2009. Capital costs for the expansions remain on budget. At Christina Lake construction of the Phase 1C expansion also remains on schedule and on budget.
Corporate developments
In May, EnCana announced a plan to split into two independent companies - one a pure-play North American unconventional natural gas company and the other a fully integrated oil company with in-situ oil properties and refineries. Preparations were undertaken in order to complete the transaction in early 2009. Uncertainty in the global financial markets caused EnCana to delay its plans until clear signs of stabilization return. In the meantime, EnCana is continuing to prepare documentation and maintain support systems in anticipation of the proposed transaction.
Financial strength
EnCana has a very strong balance sheet, with more than 80 percent of EnCana's outstanding debt comprised of long-term, fixed-rate debt with an average remaining term of more than 14 years. Long-term debt maturities in 2009 are $250 million and $200 million in 2010. At December 31, 2008, EnCana had $2.6 billion in unused committed credit facilities. EnCana targets a debt to capitalization ratio between 30 and 40 percent. At December 31, 2008, the company's debt to capitalization ratio was 28 percent and debt to adjusted EBITDA, on a trailing 12-month basis, was 0.7 times. The company expects to continue to be in the lower end of its managed ranges through 2009.
In 2008, EnCana invested $7.1 billion in capital, excluding acquisitions and divestitures, on continued development of its key resource plays and expansion of the company's downstream heavy oil processing capacity through its venture with ConocoPhillips. Acquisitions in 2008 were $1.2 billion, mainly in the U.S., and largely due to investments in Haynesville properties. Proceeds from divestitures were $0.9 billion. Depending on market conditions in 2009, EnCana may divest between $500 million and $1 billion of assets.