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Encana Incurs $1B-Plus Consecutive Impairment, Lays Off 200

Encana Corp. was stung for the second quarter in a row by impairment charges of more than $1 billion, as liquids production grew, natural gas output sank and commodity prices tanked.

More than 200 people have been laid off since the start of this month, the first big layoffs since CEO Doug Suttles came aboard in 2013 and began revamping the company.

The latest restructuring is designed to allow Encana to thrive in any commodity price environment, Suttles said Friday morning during a conference call. The company's realized gas prices were down 14% from a year ago, while liquids prices fell more than 33% in the quarter. The CEO, who has overseen a portfolio transformation in the past two years that now focuses fewer targets and more liquids, concentrated on the positives.

"Following our successful portfolio transformation in 2014, we continue to lower costs, improve well performance and increase well inventory in our four most strategic assets," he told analysts. "We exited the second quarter with significant operational momentum and we expect to accelerate liquids growth through the second half of the year."

To lower its exposure to gas, and to join its peers in the oil rush, Encana last year spent close to $10 billion to acquire acreage in the Permian Basin and Eagle Ford Shale (see Shale DailySept. 29, 2014May 7, 2014). The purchases, however, preceded the oil price debacle, which splattered red ink across Encana's bottom line and forced job cuts.

"Over the past 18 months, we've transformed our portfolio and Encana is now a very different company," spokesman Jay Averill told NGI following the conference call. "We have realigned our organization to support our existing portfolio, our strategy and our focused capital program. Unfortunately, this has resulted in staff reductions of about 200 people. These staff reductions have been broadly felt across the organization, in Canada, the U.S. and corporate departments."

The Calgary operator, considered the third largest gas producer in North America, recorded a $1.3 billion charge in the second quarter, as well as a $187 million hit related to hedging losses. In the first quarter, impairments had totaled $1.7 billion.

The increase in liquids production failed to make up for the shortfall in gas output. Total production fell 10% sequentially to 389,000 boe/d, short of a consensus Wall Street forecast of 403,000 boe/d.

Liquids production in 2Q2015 increased more than 5% sequentially and was up 87% year/year to 12,300 b/d, largely from the Eagle Ford and Permian.

Gas output, meanwhile, slumped from a year ago by 38% to 1.57 Bcf/d and fell 16% sequentially. In the first half of this year, gas production was 1.71 Bcf/d, compared with 2.68 Bcf/d for the first six months of 2014.

The losses in production relate mostly to asset sales, said Suttles, as well as takeaway restrictions in Canada's Montney formation and the seasonal production strategy for the Deep Panuke platform. Deep Panuke, offshore Nova Scotia, provides gas mostly during the winter months to U.S. Northeast markets and has little impact on gas output the rest of the year.

The one-time impairment charges severely impacted 2Q2015 earnings, with a net loss of $1.61 billion (minus $1.91/share) versus year-ago profits of $271 million (37 cents). Revenues fell to $830 million from $1.59 billion.

In the trailing four quarters, Encana has reported negative average earnings of 27.13%, according to Zacks Equity Research.

Operating losses also plunged, hitting $167 million (minus 20 cents/share), compared with year-ago profits of $171 million (23 cents). Cash flow fell from a year ago to $181 million from $656 million, and from $495 million in the first quarter.

Analysts listening to the conference call on Friday morning didn't question the losses, much of which is related to the narrower portfolio. Encana has reduced its operating focus from 30 onshore targets two years ago to only four today: Permian, Eagle Ford Shale, Montney and Duvernay formations (see Shale DailyMay 13).

The front-loaded capital program has positioned the company to build its liquids production to the end of the year, Suttles said.

More than 80% of the capital invested to date this year has been in the four strategic assets. Fifty-nine wells were ramped up in the Eagle Ford and Permian combined between April and June, with another 76 planned in the third quarter.

Like its peers, Encana has been concentrating on improving efficiencies, reducing costs and increasing output.

In the Eagle Ford, drilling and completion costs have fallen by about $1 million/well, or 18%, from the first quarter. Duvernay wells during the quarter had production rates of up to 2,000 b/d of condensate and 11.5 MMcf/d of gas after 27 days on production. A move to liquids in the Montney has resulted in higher condensate yields in Dawson South, with two recent Pipestone wells each producing more than 1,000 b/d.

The Permian, Eagle Ford, Montney and Duvernay together contributed 223,000 boe/d, or 57% of output during the second period. The four are expected to contribute an average 270,000 boe.d, or 65% of total output by the fourth quarter.

"Through our culture of innovation, we continue to identify and seize opportunities to enhance our performance and make our four most strategic assets bigger, better and more efficient," Suttles said. "Our core assets are located in the heart of four of the highest netback basins in North America and are delivering strong returns through the current commodity price cycle."

Based on assumptions of $50/bbl West Texas Intermediate and $3.00/Mcf New York Mercantile Exchange (Nymex), Encana expects to realize average operating margins of more than $25/boe in the Permian, Eagle Ford and Duvernay, and $1.15/Mcfe in the Montney.

The operator still expects to deliver 2015 cash flow estimates of $1.4-1.6 billion.

"Encana is on track to fully fund its 2015 capital program and dividend with anticipated cash flow and the proceeds from previously announced and completed divestitures," Suttles said.

At the end of June, Encana had hedged 1,000 MMcf/d of expected July-December 2015 gas production using Nymex fixed price contracts at an average price of $4.29/Mcf. In addition, 59,400 b/d of expected July-December oil production has been hedged using fixed price contracts at an average price of $61.96/bbl. Another 38,000 b/d of expected 2016 oil production is hedged at an average price of $62.83.

Encana is keeping its dividend, with plans to pay 7 cents/share at the end of the third quarter.

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