Is Encana's New Strategy Working?

Encana (NYSE: ECA  ) , Canada's largest natural gas producer, is accelerating its shift toward oil by divesting natural gas assets and ramping up activity in liquids-rich plays, as part of its recently unveiled strategy to improve returns. Let's take a closer look at its most recently announced asset sale and whether its new strategy is working.

Photo credit: Encana. 

Bighorn asset sale
Encana on Friday announced that it reached an agreement to sell its gas-rich Bighorn assets in northwestern Alberta for about $1.8 billion to privately held Jupiter Resources.
The transaction, expected to close by the end of the third quarter, includes roughly 360,000 net acres and working interests in all of Encana's pipelines, facilities, and service arrangements.

According to the company, the assets' net proven reserves as of year-end 2013 totaled approximately 1,100 billion cubic feet equivalent, of which roughly three quarters was natural gas. They were producing roughly 319,000 thousand cubic feet equivalent per day in the first quarter of this year, Jupiter said in a separate statement.

The Bighorn sale is the latest move in executing Encana's new strategic vision, unveiled by CEO Doug Suttles last November. The strategy calls for a major reshuffling of the company's portfolio in order to reduce its exposure to natural gas and increase its leverage to oil.

So far this year, the company has sold or agreed to sell some $4.1 billion worth of assets. It also recently added a premier oil-rich play to its portfolio last month when it purchased roughly 45,500 net acres in south Texas' Eagle Ford shale from Freeport-McMoRan (NYSE: FCX  ) for about $3.1 billion.

With that purchase, Encana now has six core liquids-rich plays in its portfolio, the other five being Canada's Montney and Duvernay shales, Colorado's DJ Basin, New Mexico's San Juan Basin, and the Tuscaloosa Marine Shale in Louisiana and Mississippi. This year, roughly 75% of the company's capital budget will be allocated to these plays.

New strategy paying off so far
So far, Encana's strategy has delivered some pretty impressive results. First-quarter 2014 liquids production surged by 56% to nearly 68,000 barrels a day versus the first quarter of 2013, which helped drive an 87% year-over-year increase in cash flow per share and a 192% jump in operating earnings per share.  

The company is also seeing strong initial success in the Tuscaloosa Marine Shale, or TMS, with its latest three wells meeting or exceeding expectations. In fact, one of its wells drilled on the Anderson well pad delivered a peak 24-hour production rate of 1,540 barrels of oil equivalent per day, or boe/d -- the strongest initial production rate of any TMS well to date.  

By comparison, another highly productive well drilled by Halcon Resources (NYSE: HK  ) , another major leaseholder in the Tuscaloosa Marine Shale, achieved a 24-hour average initial production rate of 1,208 barrels of oil per day, while Goodrich Petroleum's (NYSE: GDP  ) C.H. Lewis 30-19H-1 well achieved a peak 24-hour average production rate of 1,450 boe/d.

In addition to encouraging results for liquids production, earnings, and cash-flow growth, Encana's asset sales have helped significantly reduce its debt and bolster its liquidity. The company's net debt-to-debt adjusted cash-flow ratio improved markedly from over 1.5 at year-end 2013 to just 1.2 as of the end of the first quarter, while its cash position improved to $2.2 billion at quarter's end. Coupled with its access to $4.2 billion of undrawn bank lines committed until 2019, Encana has ample financial flexibility to accelerate drilling activity or pursue additional acquisitions.

Going forward, as Encana's liquids production growth accelerates, margins, earnings, and cash flow should continue to improve. The company expects liquids to account for roughly 75% of upstream operating cash flows by 2017 and reckons that liquids production growth will boost cash flow per share by 10% annually through that date.  

Investor takeaway
Encana's new strategy is off to a great start. Liquids production is growing rapidly, costs continue to trend down, margins and cash flow are improving, and the company's debt and liquidity positions have improved meaningfully. Still, despite the progress, natural gas still accounts for nearly 90% of the company's production, leaving it highly leveraged to gas prices in the near term.

OPEC is absolutely terrified of this game-changer
As Encana's shift to oil and liquids highlights, North America's energy landscape is changing radically. U.S. oil and gas production continues to surge as our country moves closer to energy independence. And there is one company front and center that is poised to make its investors rich. Warren Buffett has already committed to it, and you can, too. Click here to learn about this company in The Motley Fool's special report: OPEC's Worst Nightmare.


Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3012700, ~/Articles/ArticleHandler.aspx, 12/18/2014 8:42:54 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement