What a difference a year makes. We reported on December 16, 2014, that Calgary-based Encana bucked an industry-wide trend, announcing a highly-focused 2015 capital program of between $2.7 billion and $2.9 billion. It based its 2015 program on assumptions of $70 WTI and NYMEX natural gas prices of $4 per MMBtu. Sobriety seems to be mooring the company’s approach as we near 2016, as the ‘lower for longer’ consensus becomes more embedded in the O&G sector’s ethos.
Encana has cut its dividend by 79%, its 2016 Capex by 25%, and its production guidance next year by 13%. With WTI falling below $35/bbl in early trading Monday, producers step up their efforts to do more with less. The 2016 capital program is based on assumptions of $50/bbl WTI oil prices and NYMEX natural gas prices of $2.75 MMBtu. Steered by CEO Doug Suttles in a gas-to-oil strategy over the past two years, the company has allocated 95% of its budget on its four core areas: the Permian and Eagle Ford in the US, and the Duvernay and Montney in Canada.
Encana CEO Doug Suttles
1. Dividend Cut
Encana is planning to reset its annual 2016 dividend to $0.06 per share, or about $50 million per year. In addition the company will discontinue the dividend reinvestment plan discount after December 31, 2015.
Consequently, the combined cash and cash equivalent outlay associated with the dividend is expected to be reduced by over $185 million per year. “This reset better aligns the dividend with cash flow and recognizes the importance of the balance sheet and the very high quality investment options in Encana’s portfolio,” the company said.
2. 25% Capex Cut
Encana foresees a capital program between $1.5 billion and $1.7 billion for 2016, approximately 25% less than its 2015 budget (about $600 million lower). 95% of its total $1.5 billion to $1.7 billion planned investment next year will be devoted to its four above-mentioned core assets- 50% of that investment will be earmarked for the Permian Basin.
Source: December 14, 2015 Presentation
“We will continue to deliver strong margin growth through 2016 by directing the majority of our capital to drilling and completions activity in our core four assets. This will maintain their scale and position the company to grow long-term shareholder value and cash flow into 2017 and beyond,” CEO Doug Suttles said.
3. Production Outlook
Encana estimates total production of 340,000 to 370,000 boepd next year, down about 13% from 2015. Production from its four core assets is forecast to average between 260,000 to 280,000 boepd, representing over 75% of total forecast production.
Breaking its projections down, the company expects liquids production of 120,000 to 140,000 bpd and natural gas volumes of 1,300 to 1,400 MMcf/d.
Encana also said that Y/Y improvements in capital efficiency and operating performance are “expected to deliver a 12% increase in production from the company’s core four assets and a more than 10% increase in operating margins after normalizing for commodity prices.”
Further, Encana expects FY2016 corporate costs, such as interest and administrative expenses, to be more than 10% lower than in 2015, excluding one-time outlays, restructuring costs and long-term incentives.