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Encana’s Permian, Montney Help Drive 1Q Output 30% Higher

Encana Corp. expects to deliver 30%-plus production growth this year on expected cash flow from its four North American onshore plays, lifted by the Montney and Duvernay formations in Canada and the Permian Basin and Eagle Ford Shale in Texas.

The Calgary-based independent delivered its first quarter results on Tuesday. Production totaled 324,400 boe/d, with core assets contributing 307,500 boe/d. Total liquids production grew by 31% to 145,200 b/d year/year, with oil and condensate making up nearly 8%. Natural gas production was 1,075 MMcf/d.

Not only is output climbing, but this year’s $1.8 -1.9 billion capital program should be fully funded by expected cash flow, CEO Doug Suttles said during a conference call to discuss results.

“We are right on track to achieve our objective of growing overall production by more than 30% for 2018 while spending within cash flow,” Suttles said. “This puts us on a trajectory to deliver core asset production in the fourth quarter between 400,000 and 425,000 b/d. This is remarkable to be talking about our core production exceeding 400,000 b/d when we were producing less than 240,000 b/d only one year ago.”

He again credited Encana’s cube development model in drilling wells, which is designed to maximize the value of the land base and drive efficiency into the operations. Encana no longer drills single wells, but instead uses a stacked development technique, i.e., the cube, to ensure drilling and completions are optimized.

Permian oil production rose to 54,200 b/d in 1Q2018, with total output of 83,800 boe/d. The play is on track to deliver about 30% annual growth.

A 10-well cube in Martin County in West Texas delivered average 90-day initial production (IP) rates of 1,300 boe/d including 1,000 b/d of oil, Encana noted. The latest Midland sub-basin eight-well cube reported average IPs of 1,500 boe/d including 1,150 b/d of oil.

The Montney play, which is Encana’s top Canadian target today, is on track to double liquids production for the second consecutive year. Output in 1Q2018 totaled 165,300 boe/d, with 30,400 b/d of liquids. Five cubes were completed in the quarter, each with six to 14 wells. Average IPs were 300 b/d of condensate.

The Montney’s Tower, Saturn and Sunrise plants delivered average run-times of more than 98% in the quarter. Encana also completed a midstream agreement to support the condensate growth plan by increasing processing capacity in the Pipestone area.

Eagle Ford and Duvernay assets also are generating free cash flow, according to management, with total combined quarterly output of 58,400 boe/d.

Encana, which has directed most of its funding to the Permian and Montney, restarted its Duvernay drilling during the first quarter and ramped up in the Eagle Ford to three rigs from one. Both assets are expected to “return to growth” in the third quarter. Two Austin Chalk wells in the Eagle Ford delivered average IPs in 1Q2018 of 1,925 boe/d, 70% weighted to oil.

Mitigating Price Risks

With investors concerned about regional natural gas price risks at the AECO hub in Canada and from widening differentials in oil pricing in the Permian, Executive Vice President Rene

Zemljak spent a few minutes noting that the integration across the company enables management to effectively reduce regional price risks.

Encana has three main components to its commodity monetization, she said. “First, we need to ensure our ability to physically access markets to sell our products...Second is our drive to maximize price realizations” by focusing on cash flow margin and seeking physical market diversification. In addition, the company works to ensure it has flexible and reliable midstream transactions.

“The value of our marketing approach is evident in our first quarter results in Canada,” where Encana captured a realized natural gas price “almost equivalent” to the New York Mercantile Exchange (Nymex) benchmark, Zemljak said.

In Canada, the company has firm entry basin service on Nova Gas Transmission and firm export capacity to the Dawn, West Coast and Chicago markets, she noted. “In addition, the flow assurance this pipeline access provides exposure to numerous sales points…While AECO pricing has remained under pressure, we are currently capturing price upside in excess of our transportation costs.

“Basis hedging programs further reduce our exposure to AECO price risk for 2018,” Zemljak said. “We have financial basis hedges on 475 MMcf/d of our AECO gas and a discount of 87 cents to Nymex. This level of protection continues for three years, as we have nearly half a  Bcf/d hedged through 2020 at an 88% differential to Nymex.

During the first quarter, Encana achieved a Canadian gas price of $2.87, or about 96% of the Nymex benchmark price. Encana’s physical diversification contributed about 70 cents to the realized price, while the financial basis hedges contributed another 39 cents.

This year, Encana expects to have “less than 2% of our Canadian production exposed to AECO gas prices,” said Zemjlik.

In the Permian Basin, Encana achieved a similar outcome to reduce the Midland oil price differential exposure using gathering arrangements. About 90% of Encana’s Permian oil is gathered on the Medallion Gathering & Processing LLC system, which has more than 800 miles of pipeline and connectivity to most major market outlets.

Encana has additional Gulf Coast netbacks to further reduce its price exposure, said Zemjlik. To manage the remaining premium price exposure, the company has hedged Midland differential at an 81% discount to West Texas Intermediate for 2018, and a discount of $1.42 for 2019.

“Between our physical transportation and our basis hedges, we have no Midland price exposure in 2018,” she said. “And we have covered the vast majority of our 2019 exposure…”

For 2018 and 2019, Waha gas basis hedges are in place at a 35% discount to Nymex. Over the course of Encana’s five-year strategic plan, Zemljic estimated that Waha gas represented less than 2% of total company cash flow.

“Even though the Midland oil differentials have substantially weakened for 2018 and 2019 period, our marketing arrangements and our basis hedging program will enhance our margins and they will protect our cash flow,” she said. We are confident that over the long-term infrastructure additions will generally keep pace with production growth.

“However, the recent short-term price weakness is an example of the importance of having a regionally focused price mitigation strategy.”

As at March 31, Encana had hedged about 120,000 b/d of expected oil and condensate production and 1,026 MMcf/d of expected natural gas production for the remainder of 2018 using an average price of $55.52/bb oil and $3.02/Mcf gas.

The company generated cash from operating activities of $381 million in 1Q2018, versus $106 million in the year-ago period.

First quarter net earnings were $151 million, down from $431 million in 1Q2017, in part on foreign exchange and income tax losses. Operating earnings totaled $156 million, up from $104 million a year ago.

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