After finally appearing to put the oil market downturn in the rearview mirror with blowout results in the second quarter, Encana (OVV -0.43%) seemed to take a step back in the third quarter. Earnings dipped versus the previous year while production from its core assets barely budged. Several factors weighed on the company during the quarter, including the impact from Hurricane Harvey, an issue with some natural gas infrastructure in Western Canada, and the sale of one of its U.S. natural gas assets.
That said, one thing CEO Doug Suttles made clear on the Q3 conference call is that those results didn't impact Encana's ability to achieve its strategic goals for the year. Instead, Suttles noted, "We are on track to exceed each of these objectives." Here's a look at what he had to say about its progress this year.
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Encana has returned to growth mode
Two of Encana's goals for 2017 involved production growth. Suttles noted that it entered this year with the aim to "go from decline to growth by midyear" and "grow production from our core assets by at least 20%" versus where it ended 2016. He then pointed out that Encana's "core production went from decline to growth in the second quarter. And ... we are on track to achieve 30% growth in our core assets."
While output didn't increase much in Q3, it surged shortly after the quarter closed due to the timing of well completions and the construction of natural gas processing plants by midstream partner Pembina Pipeline (PBA 0.44%). Encana noted that Pembina brought its Tower plant online in late September and that the Sunrise plant started up a few weeks later as did the Towerbirch pipeline. With this additional infrastructure from Pembina online, Encana was able to unleash a flood of new production from its Montney shale play in Canada. In fact, the company noted that output from that region spiked 32% last month. Meanwhile, production in the Permian Basin also rose sharply in October due to the timing of well completions, which puts the company on pace to hit the high-end of its guidance range.
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The shale driller kept a firm lid on costs
That said, Encana's aim isn't just to increase production this year. It wants to grow cash flow, which is why it has also focused on keeping expenses down even as output rises, with its goal being to "ensure we maintained or enhanced the efficiencies we built in 2015 and 2016." One piece of evidence that the company is on pace to achieve that aim is the fact that it's delivering high-end production growth "without additional capital," which Suttles said "points to how our business is working and we've made our business more efficient in every area."
Encana is achieving a high rate of growth without sacrificing its efforts to push down costs because it has taken a very strategic approach to developing its shale fields. Suttles said on the call:
We deeply believe that our understanding of how Permian wells will interact with each other as a system is critical to creating real value in the play. We call this cube development, but it doesn't really matter what you call it. It's a systematic approach to creating value by maximizing both returns and recovery. The alternative is a high-cost, scattered approach to development that spreads drilling out in an effort to maximize short-term productivity but risks sterilizing resources [sic] in the long run.
By taking a slower, more systematic approach, Encana has kept its costs down by developing all the wells in an area at once. This strategy enables the company to maximize the value of its resources instead of trying to maximize short-term growth. It's an approach that's beginning to pay off and should continue doing so over the next several years.
Setting the stage for 2018 and beyond
Suttles wrapped up his prepared remarks on the call stating that Encana is "excited that the results we have delivered this year have us on track for a strong finish to 2017 and a great launching point for 2018." In fact, 2018 is when its strategy should start paying dividends, because it's when Encana anticipates that cash flow will begin a dramatic ascent and grow at a 25% compound annual rate. In fact, at $50 oil, Encana's plan will generate more than $1.5 billion in excess cash flow over the next five years. This rapidly expanding cash flow positions the company to deliver strong returns for investors even if oil falls from its current mid-$50-a-barrel level. That ability to excel at lower oil prices should put Encana close to the top of any energy investors' list of oil stocks to buy for the long term.
