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Encana Workforce Slashed by 20%, Spending Curtailed by Half

Calgary's top natural gas producer Encana Corp. has curtailed capital spending even more than it had anticipated for 2016 and is laying off 20% more of its workforce as it "relentlessly" pursues cost cutting to remain competitive, CEO Doug Suttles said Wednesday.

"The world taking on North America better get ready, because this part of the planet knows how to get efficient and you're seeing it every day," he said during a conference call to discuss results.

Capital expenditures (capex) for 2016 have been reduced to $900 million to $1 billion, 55% lower year/year and under the $1.5-1.7 billion estimate provided in December. The quarterly dividend has been cut to 1.5 cent/share from 7 cents. Including the job reductions announced Wednesday, Encana's workforce will be about half the size it was in 2013.

Encana’s results appeared to enthuse investors, who sent the share price higher on Wednesday by more than 23% (70 cents) to end the day at $3.71/share.

"We have the financial flexibility to withstand the current environment for an extended period of time," Suttles said. Encana has an estimated $4 billion of liquidity, no risks of violating financial covenants and no debt due until 2019, with 75% not due until 2030 and beyond, he said. It also slashed debt by $2 billion last year, despite the commodity squeeze.

"Each year since the launch of our strategy, we have strengthened our balance sheet, increased our financial flexibility and lowered our cost structures. We enter 2016 with tremendous liquidity, a robust hedging program and a strong balance sheet which we will continue to prudently manage and protect.

"The combination of our high quality portfolio, additional improvements in costs and capital efficiency and significant hedge position mean we have largely offset the impacts of a smaller capital program and lower oil and gas prices. Under our new plan, we will invest virtually all of our capital in our core four assets and our cost structure will be about $550 million lower than in 2015."

Encana, which once operated in close to 30 onshore areas in North America, plans to direct 95% of its capex this year to the Eagle Ford Shale and Permian Basin in Texas, and Canada's Montney and Duvernay formations. To put into perspective how key the core four plays have become, total production during 4Q2015 averaged 274,400 boe/d, or 67% of the period’s 406,800 boe/d output. Last year the core four was responsible for about half of Encana's total output; together they also achieved a reserves replacement ratio in 2015 of 233%.

Full-year 2015 production across the onshore averaged 405,900 boe/d with liquids averaging 133,400 b/d, reflecting a 54% increase from 2014. Full-year natural gas production was 1,635 MMcf/d. Total liquids production increased 36% to 145,000 b/d.

Output is expected to decline this year, including the impact of asset sales, to average 340,000-360,000 boe/d net. Natural gas production is forecast to be 1.3-1.4 Bcf/d, while total liquids volumes average 120,000-130,000 b/d.

One area where Encana is achieving big cost savings is the land retention vertical drilling program in the Permian, which is expected to save the company about $100 million this year while still allowing it to hold core acreage, Suttles said during the conference call.

As a result of efficiency improvements, "even if prices remain low for the next several years, we are positioned to preserve value. Any asset divestitures would be an upside to this case. We continue to take decisive steps in 2015 to manage through this challenging environment. These actions have made our business stronger, and we will build on that momentum this year."

The cost structure this year is expected to be about $550 million less than in 2015, with $200-250 million captured from cost reductions of $75-125 million in transport/processing, $50 million in operations, $25 million in taxes and $50 million in overhead.

Mike McAllister, who oversees the onshore operations, said the resource play hub design and fit-for-purpose rigs resulted in a 30% reduction in cycle time and drilling/completion (D&C) costs in the Permian. In the final three months, "we averaged $5.9 million per well D&C cost, which was actually our original 2016 target. We continue to find efficiencies in all facets of the business."

With the 12% reduction in lease operating expenses, Encana also increased realized prices by $1.50/bbl through midstream contract negotiations, he said. In the Eagle Ford, D&C costs fell 35% year/year to average $5.1 million/well. And in the Duvernay, the focus to reduce well costs, cycle time and improve production paid off, said McAllister.

Encana hit record production levels in the Duvernay during 4Q2015 with output up by 75% sequentially. Meanwhile, in the Montney, Encana "actively managed transportation options" and minimized curtailments, which were lifted late last year. Encana also brought on additional liquids-rich wells in the Tower area of the Montney, which more than doubled condensate production from Cutbank.

Net gas reserves after royalties of 4.1 Tcf decreased 1.4 Tcf from 2014 primarily because of 1.2 Tcf from sales and negative revisions from price changes. Extensions and discoveries of 0.6 Tcf replaced 91% of net gas output. Net proved oil and liquids reserves increased 23.6 million bbl from 2014 to 380.1 million bbl from extensions and discoveries that added 107.9 million bbl. Extensions and discoveries in oily fields replaced 222% of net output from 2014.

Overall losses in 4Q2015 totaled $612 million, which included a $514 million one-time impairment charge against the value of its gas and oil reserves. In the year-ago period, Encana earned $198 million. Operating earnings climbed to $111 million (13 cents/share), versus year-ago profits of $35 million (5 cents).

Encana has hedged close to 75% of 2016 expected gas, oil and condensate production. Hedged gas includes 740 MMcf/d of March to December output using New York Mercantile Exchange (Nymex) fixed price contracts averaging $2.76/Mcf. Encana has also executed 335 MMcf/d of 2016 Nymex hedges as costless collars, combining purchased put strike prices of $2.22/Mcf and sold calls averaging $2.46/Mcf. About 255 MMcf/d of expected 2017 gas production is hedged under three-way options combining an average sold call of $3.07/Mcf, purchased put of $2.75 and sold put of $2.26.

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