Encana Corp., one of the largest North American natural gas producers, is so encouraged by a spate of recent efficiency improvements and rising production that it has increased both its 2016 production guidance and capital guidance.

“Our stronger returns and expected sales proceeds are giving us the confidence to increase capital spending in 2016 to position us for growth in 2017,” CEO Doug Suttles said during a conference call Thursday to discuss second quarter performance. “We have once again dramatically lowered our drilling and completion costs in each of our core four assets,” Canada’s Montney and Duvernay formations, the Permian Basin and the Eagle Ford Shale.

Calgary-based Encana raised its 2016 capital investment by $200 million to $1.1-1.2 billion, and increased its 2016 production guidance to 340-360 MBoe/d from the previously announced 330-350 MBoe/d.

Encana, which beat its 2016 drilling and completions cost reduction targets in the first quarter (see Shale Daily, May 3), continued to lower drilling and completion costs across its core four assets in the second quarter, “and they are now over 30% lower compared to the 2015 full-year average,” the company said.

The core four contributed 268,300 Boe/d, about 73% of total 2Q2016 production of 368,300 Boe/d. Total liquids production averaged 132,000 b/d and natural gas production averaged 1.4 Bcf/d.

In the Permian, Encana completed the Midland Basin’s first 14-well pad, which peaked at 12,000 Boe/d and is currently producing more than 10,000 Boe/d gross. In addition, it delivered a 10% quarter-over-quarter reduction in average drilling and completion costs, 31% lower than the full-year 2015 average. Average drilling and completion costs were 38% lower than the 2015 average in the Eagle Ford, 40% lower in the Duvernay and 33% lower in the Montney.

Encana agreed last month to sell its Gordondale properties in the Montney formation to Birchcliff Energy Ltd. for $488 million (see Shale Daily, June 22).

The sale includes 54,200 net acres of land and associated infrastructure in northwestern Alberta (AB). Encana has an estimated 525,000 net acres in the Montney, and with the sale, it would have an estimated 470,000 net acres, including 9,000 drilling locations with two-thirds of the wells in the condensate-rich portion of the play.

Canada’s top natural gas producer has been shoring up its liquidity by selling off acreage that it no longer considers key to its growth. Capital spending was curtailed by 55% from 2015 to $900 million and the workforce has been reduced to about half the size it was in 2013 (see Shale Daily, Feb. 24).

That sale, and a $900 million sale of Encana’s Denver-Julesburg Basin assets announced last year (see Shale Daily, Dec. 24, 2015), are both expected to close next week, Suttles said, delivering proceeds of about $1.1 billion.

“The additional capital will be directed to high return wells across the core four plays, with the largest allocation going to the Permian,” Suttles said. “The reinvested savings, plus the additional capital, will add 50% more wells to our 2016 program for only 20% more capital…

“We now expect our core four production to stay much flatter through the year by adding an incremental 13,000 Boe/d in the fourth quarter. In effect, we are immediately replacing the bulk of the Gordondale volumes with production from our core four. This is significant because this additional production has a margin that is five times higher than the volumes we sold. The additional capital activity has an even larger impact in 2017, adding 30,000-35,000 Boe/d of which about 75% is liquids. These significant improvements position us to grow cash flow in 2017, and means for the second consecutive year, in a difficult commodity price environment, we expect to reduce net debt.”

Encana reported a better-than-expected quarterly loss of $601 million (minus 71 cents/share), largely attributable to non-cash items such as after-tax ceiling test impairments and an after-tax unrealized hedging loss, compared with a year-ago loss of $1.61 billion (minus $1.91). Cash flow in 2Q2016 was $182 million, compared with $181 million in 2Q2015.

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