Primed by growth from core areas and improved optimization in its onshore drilling techniques,, Encana Corp. is eyeing 30% production growth over 2016, with October volumes already sharply higher from third quarter volumes, the Calgary-based independent said Wednesday.

Total production between July and September reached 284,000 boe/d, with October output already above 325,000 boe/d, a 14% increase.

CEO Doug Suttles helmed a conference call with his management team to discuss 3Q2017 results, how much output improved in October, and what’s on the agenda for 2018.

“We’ve grown our corporate margin to $10.77/boe,” Suttles said. “Our focus on high-value oil and condensate production in our core assets has led us to breaking through the 300,000 boe/d mark in October. This represents a 27% increase from the fourth quarter of 2016.

“Our focus on high-margin production puts us well on track to deliver a corporate margin of $11/boe for the full year of 2017 and gives us confidence as we head into 2018.”

The core assets each are outperforming, he said.

“We continue to innovate in all aspects of our business. This is driving upside for us by unlocking the resource on our acreage more efficiently than many competitors…We’ve been very transparent about our strategic approach to development in stacked pay fields…”
Suttles and COO Mike McAllister spent a few minutes discussing Encana’s “cube” development, a systematic approach similar to the manufacturing hub technique the company perfected as unconventional drilling began a decade ago.

Encana no longer drills single wells as it no longer makes economic sense, Suttles said. Credit the cube, a stacked development technique to ensure drilling and completions are optimized. During the second quarter the cube advantage led to average 180-day initial production type curves improving by 20-45% in the core four. There’s no going back now, said the executives.

“I can’t think of a single well that’s not going to be drilled that’s not in a cube,” McAllister said.

Using the cube concept in the Permian, within Midland County in West Texas, a variety of well spacing pilots are being used to develop five benches that imply a well density of 25-50 wells per section.

“Our most recent 10-well cube development incorporates our latest completion designs and…the early results are averaging over 1,600 boe/d with oil rates averaging over 1,000 b/d,” McAllister said.

With the first 28-well cube that drilled in the Montney Tower area, the company had a 25% reduction in well costs, he said. The Tower cube also led to a higher liquids-to-gas ratio than Encana had expected.

“We’re never going to stop learning, we’re never stop trying to improve, but we’ve seen some pretty significant improvements,” both in the Permian and Montney,” McAllister said. “There’s is more to come…There’s more learnings to come, but we’re really, really encouraged by what we’re seeing so far.”

The core four leaseholds — Permian, Montney, Eagle Ford Shale and Duvernay — produced a total of 248,000 boe/d in 3Q2017, with October production from the group already up 22% to 302,000 boe/d-plus.

Each of the core four should meet or exceed 2017 targets.

“Driven by innovation and strong execution, each of our core assets is firmly on track to meet or beat its 2017 targets,” said Suttles. “Consistent with our plan, the Permian and Montney are delivering significant oil and condensate growth in the fourth quarter, driving continued corporate margin expansion and setting the stage for a strong finish to the year.”

Permian production in October averaged 80,000 boe/d, which was 25% higher than in 3Q2017 and ahead of a 4Q2017 target of 75,000 boe/d.

“Looking out to 2018, we expect our activity levels in the Permian to look much like this year,” said McAllister. “Our integrated supply chain management is enabling us to control the risk of potential service cost inflation. We’ve now successfully contracted our fracturing services for 2018 at competitive rates. These arrangements give us the ability to retain our high performing fracture crews through the year.

“In addition, we are also well positioned on sand and water supply to keep our cost amongst the very best in the industry. And we expect our operating costs to be even lower in 2018.”

Meanwhile, Montney’s production in October jumped by one-third from the third quarter to 147,000 boe/d, with liquids up 42% to 25,000 b/d-plus.

Encana’s total liquids output during 3Q2017 totaled 127,500 b/d, with oil/condensate production of 103,100 b/d. In October, liquids production increased by another 18% to more than 150,000 b/d, with oil/condensate output rising by 16% to 120,000 b/d.

Third quarter liquids volumes contributed 45% of total company production, up from 35% in the year-ago quarter. The core assets contributed 87% of total volumes, even with impacts from Hurricane Harvey and third-party Western Canada natural gas curtailments.

“Our increasing liquids mix is driving our margins higher,” McAllister said. About 75-80% of Encana’s liquids production is condensate, “which trades at a premium in Canada. Our Montney margin in the fourth quarter this year is expected to increase by 50% compared to a year ago. To put this in context, this higher margin equates to an incremental annualized cash flow of about $200 million.”

Gas production, once the mainstay of Encana’s volumes, averaged 939 MMcf/d during 3Q2017, down from year-ago volumes of 1.326 Bcf/d and sequential output of 1.146 Bcf/d. Encana attributed the decline to the loss of gassy assets sold last spring in the Piceance Basin.

While gas volumes are falling, oil and liquids output is strong and getting better. The Permian alone is on track to deliver 50% production growth between the fourth quarter of 2016 and the fourth quarter of 2017, management said.

From the Montney, liquids production in October climbed above 25,000 b/d, up 42% from the third quarter. Encana’s margin in the Montney is now expected to increase by more than half from the end of this year through 2017. Montney productivity gains were credited to precision well targeting and advanced completions in driving well productivity. Saturn, the third of three facilities to support condensate-focused growth, started up in early November.

The Eagle Ford in South Texas also is outperforming 2017 targets, with October production averaging 51,000 boe/d. Liquids volumes alone totaled 41,000 b/d.

Encana also delivered record Duvernay production in the quarter, with its first advanced completion pilot. During October, production rose 16% above 3Q2017 to average 24,000 boe/d-plus, with liquids output around 12,000 b/d, or 22% higher.

Net earnings fell year/year to $294 million (30 cents/share) in 3Q2017 from $317 million (37 cents). Operating cash totaled $357 million versus $186 million.

By year’s end, Encana expects to deliver 10% capital productivity improvement from 2016. Through September, transportation and processing costs had fallen by $98 million and operating expense was down by $56 million. Next year total capital and cash flow also are set to balance, management said.

Through its five-year plan, which is built on flat $50/bbl West Texas Intermediate oil and $3.00/Mcf New York Mercantile Exchange gas, Encana expects its return on capital employed to climb to 10-15%. It also expects to deliver 25% compound annual growth and to generate around $1.5 billion of cumulative free cash flow.

“Our financial and operational performance demonstrates our strategy is working and that we can deliver quality corporate returns through the commodity cycle,” Suttles said. “We are generating significant momentum for 2018 and are strongly positioned to deliver leading returns, cash flow growth and free cash flow through our five-year plan.”

As of Oct. 31, Encana had hedged 88,000 b/d of expected oil/condensate production for the balance of 2017 at an average price of $53.69/bbl and hedged 865 MMcf/d of expected 2017 natural gas production at an average price of $3.02/Mcf. For 2018, the company has hedged 88,000 b/d at an average of $53.23/bbl and 660 MMcf/d of expected gas production at an average of $3.07/Mcf.