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Jury still out on EnCana split Analysts struggle to put initial financial reports in context; companies say they are positioned to achieve output growth goals Gary Park For Petroleum News
Caught in the credit squeeze of late 2008 when it needed an estimated US$5 billion in debt to break itself into separate natural gas and oil sands units, the big Canadian independent EnCana put breakup plans on hold because funds were not available at reasonable interest rates.
But the re-creation of EnCana and the creation of Cenovus Energy formally moved forward on Dec. 1 and now the new entities have delivered their first report cards, covering the final quarter of 2009.
Yet the impact of the strategic reorganization, designed to give the market a fairer chance to assign value, is far from clear.
In the view of Lanny Pendill, an analyst at Edward Jones, “it was a pretty messy quarter and hard to draw comparisons.”
Knowing that the split would create difficult accounting and several one-time items that would make a straight comparison difficult, to arrive at bottom line numbers EnCana and Cenovus developed pro-forma numbers, which were based on the assumption that the split had occurred at the start of 2008 — thus comparing apples with apples on both an annual and final-quarter basis.
However, analysts are still wrestling with the comparisons and offered widely divergent estimates of the results as they tried to get a better fix on how the two companies would perform as separate businesses.
Andrew Potter, an analyst with UBS Securities, wrote that the “considerable variance” had generated a “tremendous noise” over the corporate restructuring.
Company has rosier view The company leaders had a much rosier view.
EnCana Chief Executive Officer Randy Eresman said the transformation into “two highly focused energy producers” had positioned EnCana to “achieve even greater success through significant, low-cost organic natural gas production growth for many years ahead.”
Cenovus Chief Executive Officer Brian Ferguson said his company was being launched “from a position of strength — a vast resource base, a solid financial foundation and a track record of superior operational performance.”
On the pro-forma basis (with both companies reporting in U.S. dollars), EnCana reported final-quarter operating earnings of $373 million, down 32 percent from a year earlier, and cash flow of $930 million, down 38 percent. For the full year, earnings were $1.77 billion, down 32 percent, and cash flow was $5.02 billion, down 21 percent. Total production for the fourth quarter was 2.83 billion cubic feet equivalent per day, a drop of 11 percent, and for the full year 3 bcf equivalent, a dip of 4 percent.
Cenovus, which took a one-time tax cost of $400 million related to the split, reported cash flow for the fourth quarter of $225 million, compared with a loss of $174 million in the same quarter of 2008; operating earnings were $152 million, compared with a loss of $123 million. For the full year, Cenovus reported a 20 percent decline in cash flow to $2.47 billion and a 19 percent drop on operating earnings to $1.31 billion.
Oil and liquids production for the quarter was 114,500 barrels per day compared with 103,317 bpd in the fourth quarter of 2008, but natural gas dipped to 765 million cubic feet per day from 879 million.
The 2009 total was 109,784 bpd for oil and liquids compared with 100,250 bpd and for gas, 824 million cubic feet compared with 905 million.
Basis for future comparison The company leaders had a much rosier view.
EnCana Chief Executive Officer Randy Eresman said the transformation into “two highly focused energy producers” had positioned EnCana to “achieve even greater success through significant, low-cost organic natural gas production growth for many years ahead.”
Cenovus Chief Executive Officer Brian Ferguson said his company was being launched “from a position of strength — a vast resource base, a solid financial foundation and a track record of superior operational performance.”
On the pro-forma basis (with both companies reporting in U.S. dollars), EnCana reported final-quarter operating earnings of $373 million, down 32 percent from a year earlier, and cash flow of $930 million, down 38 percent. For the full year, earnings were $1.77 billion, down 32 percent, and cash flow was $5.02 billion, down 21 percent. Total production for the fourth quarter was 2.83 billion cubic feet equivalent per day, a drop of 11 percent, and for the full year 3 bcf equivalent, a dip of 4 percent.
Cenovus, which took a one-time tax cost of $400 million related to the split, reported cash flow for the fourth quarter of $225 million, compared with a loss of $174 million in the same quarter of 2008; operating earnings were $152 million, compared with a loss of $123 million. For the full year, Cenovus reported a 20 percent decline in cash flow to $2.47 billion and a 19 percent drop on operating earnings to $1.31 billion.
Oil and liquids production for the quarter was 114,500 barrels per day compared with 103,317 bpd in the fourth quarter of 2008, but natural gas dipped to 765 million cubic feet per day from 879 million.
The 2009 total was 109,784 bpd for oil and liquids compared with 100,250 bpd and for gas, 824 million cubic feet compared with 905 million.
Basis for future comparison Whatever the value of the comparisons, the fourth quarter numbers provide the basis for future comparison.
Pendill said the “key metrics show that EnCana is definitely off to a good start.”
Mark Friesen, with Versant Partners, said the comments EnCana made about the North American gas market “give me pause.”
In response to market weakness, EnCana shut-in 300 million cubic feet per day of gas last year, but expects most of that will be back onstream by the end of this quarter as it targets average output of 3 bcf per day in 2010 — a crucial element of its goal of 10 percent average annual growth over the long term.
Eresman said the biggest issue that impacted the gas industry last year was the “lowest average commodity price in seven years,” adding EnCana believes the abundance of new North American supplies from unconventional sources such as shale gas “likely herald a future of low and less volatile gas prices” that are “here to stay.”
He said the rapid evolution of horizontal drilling and well fracturing means “supply can meet demand at a much lower price than historically.”
Cost efficiencies a priority A greater priority for the company is to continue working on cost efficiencies, which resulted last year in a lowering of average well costs by 25 percent to $10 million-$12 million in British Columbia’s Horn River shale play and by 40 percent for completion and tie-in costs to $9 million per well in the Haynesville play of Texas and Louisiana.
EnCana was also able to report a sharp cut in its finding and development costs for 2009 to $1.62 per mcf equivalent, down 30 cents per mcf equivalent from the 2007-09 average.
Although there is much still to be learned about the Haynesville play, Eresman said it “has the potential to become” the company’s leading resource performer as the company aims to more than double current production to 400 million cubic feet per day at the end of 2010.
Horn River is also expected to make rapid gains from 20 million cubic feet per day currently to average 50 million this year and end 2011 at 200 million.
Mike Graham, president of EnCana’s Canadian division, said a well pad can now have up to 20 long horizontal wells and the number of well fractures per well is increasing.
But two other British Columbia plays posted sharp declines in the fourth quarter — Greater Sierra averaged 178 million cubic feet per day, off 22 percent from a year earlier, and Cutbank Ridge was 254 million cubic feet per day, down 18 percent.
Cenovus enthusiastic Cenovus painted an enthusiastic picture of its near-term outlook, especially for its kingpin Foster Creek and Christina Lake thermal-recovery projects, which are expected to yield 10-15 percent annual production growth over the next five years.
The company said it hopes to accelerate the startup of its fourth phase at Christina Lake, adding 40,000 bpd by mid-2013, six months earlier than scheduled.
Foster Creek is currently delivering 52,000 bpd and destined for 210,000 bpd within seven years and Christina Lake is on track for growth from 7,500 bpd to 218,000 bpd.
In addition, Cenovus said a regulatory application should be filed by this summer for its Narrows Lake, expected to be developed in two or three stages, each of 40,000 bpd, while its Borealis steam-injection project is before regulators and is expected to come onstream at 35,000 bpd.
Total proved reserves were estimated at 1.4 billion barrels of oil equivalent entering 2010, up 8 percent from a year earlier, with bitumen reserves increasing 24 percent to 866 million barrels, but natural gas — a vital fuel source for the oil sands operations — slipped 24 percent to 1.53 tcf.
Ferguson said there was no need for Cenovus to acquire more oil sands assets to achieve the growth targets, noting the company is “literally only scratching the surface” of Foster Creek and Christina Lake.
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