Encana Corp.’s well costs in the Anadarko Basin have fallen by about $1 million since it completed the Newfield Exploration Co. merger in February, with a “line of sight to significantly more savings” in the months ahead, the Calgary-based independent said Tuesday.
Following its $7.7 billion takeover of one of the Anadarko’s top producers, Encana already has exceeded annualized general/administrative (G&A) synergies by $25 million and has increased its estimate of the combined synergies to $150 million from $125 million.
“We are off to a very strong start to 2019,” CEO Doug Suttles said during a conference call to discuss results. “Integration of Newfield into Encana has gone exceptionally well, and we now expect to deliver annual G&A synergies of at least $150 million, 20% greater than our original commitment.”
The “largest components” of the cost savings were people-related and eliminating duplicative roles, he said. “We also streamlined our structure throughout the company, reducing total headcount by 15% and leadership roles by 35%. Today, we have fewer senior leaders” than it had before the merger.
Beyond the personnel savings, Encana was able to save on office space, insurance costs, audit and credit facility fees, board fees, consulting and data license spending and from lower dues and trade association costs, Suttles said.
Encana has increased its G&A outlook to $75 million/quarter. “To put the significance of the total $150 million of annualized G&A savings into perspective, it equates to more than our annual total dividend,” the CEO said.
Encana also expected to reduce well costs in the Newfield assets within the Anadarko by at least $1 million/well.
“I can tell you that we have already achieved our stated well cost savings, and we have a line of sight to much greater numbers as we fully implement our proven model,” Suttles said. We are highly encouraged about what we can do going forward,” with the most recent wells delivering even larger savings than $1 million.
“All of this was accomplished within weeks of closing. This strong start gives us confidence that we will meet our annual guidance, deliver competitive growth and generate substantial free cash within our stated capital guidance.”
Year-to-date, Encana has executed about 61% of its share buyback program and increased the dividend by 25%.
Encana posted a quarterly loss of $245 million (minus 20 cents/share) versus year-ago profits of $151 million (16 cents). The losses were blamed on derivatives losses that totaled $427 million, as well as $113 million in restructuring costs and $31 million in acquisition-related spend.
Pro forma capital spending remains at $2.7-2.9 billion, which includes about 15% liquids growth this year from the core assets. First quarter upstream capital expenditures totaled $913 million, in line with previous expectations, and driven by higher activity in the Anadarko and front-end weighted capital programs in the other assets.
Total combined pro forma production in 1Q2019 was 566,600 boe/d, 13% higher year/year. Liquids production grew 15% to about 292,700 b/d.
With the addition of the Anadarko Basin, production from Encana’s core growth assets grew more than 20% year/year, averaging 443,300 boe/d. Total output from the Anadarko alone increased 23% from a year ago, averaging 144,800 boe/d, 61% liquids.
In the Permian Basin, production averaged 91,200 boe/d, 84% liquids. Output temporarily was impacted by 3,200 boe/d from third party midstream outages that primarily impacted natural gas liquids and natural gas volumes.
Production from the Montney formation in Western Canada averaged 207,300 boe/d, mostly gas-weighted. Recent wells, drilled and completed for $4.3 million/well, have outperformed type curve with early flow rates of 1,500 b/d-plus of condensate, Encana noted. Montney output was temporarily impacted in the quarter by midstream curtailments, reducing about 4,300 boe/d.
“The Anadarko, Permian and Montney...will constitute about 75% of our capital investments this year and are expected to generate about 15% liquids growth, at high returns,” Suttles said. Capital was weighted to the first six months because of the Newfield transaction.
“As we move through the second quarter, we are seeing a more level-loaded profile for our core growth assets and activity in our other assets will wind down,” the CEO said.
At the time Encana completed the merger, Newfield was running 11 rigs and eight fracture spreads in the Anadarko.
“We rapidly level-loaded activity and today have four rigs that will be supported by two fracture spreads for the remainder of the year. Importantly, with the big efficiency gains we are seeing, we will drill and complete nearly as many wells under this scenario as the latter.”
Encana at the end of March had hedged through 2019 about 106,000 b/d of expected oil and condensate production at an average price of $60.42/bbl. The company also has about 958 MMcf/d of its expected remaining 2019 gas production hedged at an average price of $2.76/Mcf.
CFO Sherri Brillon said Encana’s market diversification strategy continued to enhance cash flow margins in the quarter, adding $1.60/boe. The Permian oil realized price was about 98% of West Texas Intermediate, nearly $4/bbl higher than the Midland benchmark.
The Canadian natural gas price fetched was almost double the AECO benchmark, or about 90% of the New York Mercantile Exchange, she said.
“Now that we have the restructuring and transaction costs behind us, we expect to be free cash flow positive by mid-year.”
Suttles was clear about capital plans.
“Higher oil prices will not lead to more capital spending,” he told analysts. “Our capital budget is fixed, and we believe that Encana has the right balance of liquids-growth, free cash flow and return of cash to our $1.25 billion share buyback program.”