Is Encana's New Strategy Working?

Encana’s new strategy of focusing on liquids is delivering strong initial results.

Jun 30, 2014 at 10:12AM

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.

Encana Corporation

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.

Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers