Encana Corp. is being judicious with its capital spending in 2016, planning now to reduce the budget by 25% and tailor nearly all of it to the “core four” in the onshore — the Permian Basin, Eagle Ford Shale, Montney and Duvernay formations. Half of the budget is to target the Permian, CEO Doug Suttles said Monday.

The $1.5-1.7 billion budget is down by about $600,000 from this year, or 25%, and it could be “scaled up or down and redirected based on market conditions,” Suttles said during a conference call.

From the four major plays, a 12% overall increase in output is projected. The Calgary independent also is forecasting a 10%-plus jump in operating margins, with drilling and completion (D&C) costs slated to drop by 10-15% and corporate costs declining by at least 10%.

“Following the launch of our strategy in 2013, we have built a focused, high margin portfolio in North America’s best plays, reduced debt, lowered costs and driven greater efficiency in our operations,” Suttles said. “As a result, every dollar we invest in 2016 will deliver higher margins and quality corporate returns.

“We will continue to deliver strong margin growth through 2016 by directing the majority of our capital to drilling and completions activity in our core four assets. This will maintain their scale and position the company to grow long-term shareholder value and cash flow into 2017 and beyond.”

Production from the core four is expected to average 260,000-280,000 boe/d, representing more than 75% of total expected output. Companywide output is estimated at 340,000-370,000 boe/d, with liquids production of 120,000-140,000 b/d and natural gas volumes of 1.3-1.4 Bcf/d, each reflecting the impact of previously announced and completed divestitures in 2015.

Total planned capital expenditures by core area are:

Longer laterals and more wells per pad is the plan in the Permian, where Encana plans a vertical drilling program and output growth of 30% from this year. In the Eagle Ford, delineating the upper formation’s potential north of Houston is the priority, with total output up 10% year/year and more than 600 wells planned. Encana has been working the two Texas plays for a little more than a year. It paid $7 billion to buy Permian-focused Athlon Energy Inc. (see Shale Daily, Sept. 29, 2014). Another $3.1 billion was spent last year to acquire the Eagle Ford leasehold from Freeport-McMoRan Inc. (see Shale Daily, May 7, 2014).

In the Duvernay, growing production to fill a plant ramping up next year is key, with output estimated at 18,000-20,000 boe/d. The focus in the Montney is to “fill existing infrastructure” to maintain production, with a shift to the more condensate-rich parts of the play. The Montney is going to be impacted by facility turnarounds, which are expected to reduce production by 8,000 boe/d in the second quarter.

The base assets include the Deep Panuke natural gas project offshore Nova Scotia, where a “seasonal operating strategy” is in place to shut in during the summer months and ramp up in the winter month to serve New England. Annualized production for 2016 is estimated at 40 MMcf/d.

The 2016 capital program is based on assumptions of $50/bbl West Texas Intermediate oil and New York Mercantile Exchange (Nymex) gas prices of $2.75/MMBtu. Capex is to be funded through estimated cash flow of $1.0-1.2 billion and existing credit facilities.

Encana also has cut its 2016 dividend by 79% to 6 cents/share, or about $50 million/year. In addition the company plans to discontinue the dividend reinvestment plan discount at the end of this month.

“We continue to view the dividend as an integral part of shareholder returns,” Suttles said. “This reset better aligns our dividend with our cash flow, our balance sheet and recognizes the very high quality investment options within our portfolio.”

Encana expects to complete $2.7 billion in asset sales this year, and it has a bought deal equity offering in Canadian markets of C$1.44 billion.