Encana's (NYSE:ECA) plan to create value for investors continued gaining steam during the first quarter of 2018. Earnings and cash flow soared thanks in part to a big uptick in the production of higher margin oil and natural gas liquids (NGLs). Because of that, the oil company is on pace to deliver exceptional results in 2018.

Drilling down into the numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Operating income

$156 million

$101 million

50%

Cash flow

$400 million

$278 million

44%

Cash flow margin per BOE

$13.70

$9.72

41%

Data source: Encana. BOE = barrels of oil equivalent.

A natural gas drilling rig at dawn in a snowy field.

Image source: Getty Images.

Encana has focused most of its efforts on drilling wells in the Permian Basin of Texas and Montney Shale in Western Canada because they deliver the highest returns and margins. That strategy of focusing on drilling for returns paid off during the first quarter by helping drive the company's margin per barrel up more than 40%, which fueled even more robust growth in earnings and cash flow. As a result, adjusted earnings came in at $0.16 per share, which beat expectations by $0.03 per share.

Leading the way was the company's operations in Permian Basin where production rocketed 49% year over year to an average of 83,800 barrels of oil equivalent per day (BOE/D). Encana has taken a very methodical approach to develop this region so it can maximize returns. That strategy is clearly paying off.

The other needle-mover this quarter was the Montney, where production averaged 165,300 BOE/D, including 30,400 barrels of liquids per day. Encana's liquids output has doubled over the past year thanks to recently completed infrastructure, and it should double again in 2018 as those plants fill up and additional ones come online.

Meanwhile, the company started ramping up its operations in the Duvernay and Eagle Ford Shales during the quarter to return both to growth later this year. Overall, production from the company's four core assets averaged 307,500 BOE/D, with liquids output averaging 145,200 barrels a day, up 31% year over year.

A look at what's ahead

"The first quarter marked a solid start to the year and reinforces our confidence in our plan to deliver more than 30% growth within corporate cash flow," according to CEO Doug Suttles. Like the first quarter, the bulk of that growth will come from the Permian Basin and Montney. Overall, the company sees its Permian output rising 30% while liquids production from the Montney should double.

This growth isn't just for the sake of growth, though, because the company's focus is on drilling its highest-return locations, which should continue growing margins and cash flow at a rapid pace. Because of that, Encana is on a trajectory to increase cash flow at a 25% compound annual rate over the next five years, while generating an estimated $3 billion in free cash if oil averages $55 a barrel.

Given that gusher of free cash on the horizon, Encana has started returning some of the excess money on its balance sheet to shareholders via a stock buyback program. It repurchased $111 million in stock during the first quarter (retiring nearly 1% of its shares outstanding) as part of its $400 million authorization, which is likely only the beginning given the windfall of free cash flow it sees up ahead.

Several fuels to drive future growth

Encana's focus on growing the production that increases margins continued paying off during the first quarter. It's a strategy that positions the company to deliver peer-leading cash flow growth in the coming years, even if oil prices pull back from their current level of close to $70 a barrel. Add in the company's share repurchase program, and Encana remains well positioned to create significant value for investors in the coming years.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.