Encana delivered strong financial performance in the second quarter driven by continued liquids growth, efficiencies and robust realized prices. Year-over-year, the company more than doubled cash from operating activities and increased its non-GAAP cash flow and cash flow margin by 67 and 57 percent, respectively. Encana is on track to grow annual production by over 30 percent and now expects to generate free cash flow in 2018. The company has raised its expected full-year average non-GAAP cash flow margin to about $16 per barrel of oil equivalent (BOE).
Second quarter highlights include:
“We delivered strong financial performance through the second quarter and continue to demonstrate our ability to execute efficiently at scale in a busier market,” said Doug Suttles, Encana President & CEO. “Driven by liquids growth, efficiencies and robust realized prices resulting from our market diversification strategy, we are successfully converting rising commodity prices into margin growth and quality returns.”
“Our performance positions us for a strong second half of the year and has us on track to generate free cash flow in 2018, one year earlier than originally targeted in our five-year plan,” added Suttles. “Our multi-basin portfolio continues to provide a competitive advantage, helping us effectively manage risk, provide optionality to direct capital to our highest margin opportunities and transfer learnings across the business.”
Strong financial results: Liquids growth, efficiencies and market diversification drive margin expansion
Oil and condensate growth, efficiencies and robust realized pricing are increasing margins, revenue and returns. The company generated cash from operating activities of $475 million, up from $218 million from the second quarter of 2017. Encana recorded a second quarter net loss of $151 million primarily attributable to a non-cash, before-tax, unrealized net loss on risk management of $326 million. Non-GAAP operating earnings grew 10 percent year-over-year to $198 million.
Year-over-year, non-GAAP cash flow grew 67 percent to $586 million with non-GAAP cash flow margin growing 57 percent to $19.09 per BOE, including a net recovery of taxes and interest of approximately $75 million which added about $2.44 per BOE in the quarter. Driven by strong year-to-date performance, Encana has raised its expected full-year average non-GAAP cash flow margin to around $16 per BOE from its original target of $14 per BOE. The company now expects to generate free cash flow in 2018, one year earlier than outlined in its five-year plan.
Second quarter production totaled 337,900 BOE/d, up seven percent year-over-year, with the company's core assets contributing 96 percent of total volumes. Year-over-year liquids production grew by 24 percent to 155,300 bbls/d, including a 48 percent increase in condensate. Oil and condensate contributed 76 percent of second quarter liquids production. Natural gas production was 1,095 million cubic feet per day (MMcf/d).
Encana is firmly on track to grow total production by more than 30 percent from 2017, after adjusting for 2017 dispositions. The company expects its core assets will deliver fourth quarter production of between 400,000 BOE/d and 425,000 BOE/d. Encana's capital program, which was weighted to the first half of the year, is on track with guidance.
Strong operational performance: Cube development maximizes recovery, efficiency and returns
Encana continues to maximize the value of its multi-basin portfolio by allocating capital to its highest return opportunities and optimizing resource recovery and efficiencies through its cube development model. Consistent with its plan, the company is on track to deliver significant oil and condensate growth through the second half of the year. Second quarter operational highlights include:
Permian: Strong well performance and continued efficiencies
Montney: On track to double liquids volumes for second consecutive year
Eagle Ford and Duvernay: High-return growth
Share repurchase program
Encana continued to advance its previously announced $400 million share repurchase program. Year-to-date, through its normal course issuer bid, the company has purchased and cancelled approximately 16.8 million common shares for total consideration of about $200 million. Encana expects to repurchase the full $400 million authorized under the program by year-end.
Market diversification: Ensuring market access and maximizing realized prices
The focus of Encana's market diversification strategy is to maximize price realizations, ensure efficient market access to support the company's growth plan and manage regional price risk. Encana's integrated and proactive approach has contributed approximately $70 million in additional non-GAAP cash flow during the second quarter and around $100 million year-to-date.
Through a combination of pipeline transportation and term financial basis hedging, Encana has virtually no exposure to Midland oil pricing through 2018 and limited exposure through 2019. Including basis hedges, the company's second quarter Permian realized oil price was $70.15 per barrel, or 103 percent of WTI.
As at June 30, 2018, Encana has hedged approximately 128,300 bbls/d of expected oil and condensate production and 1,084 MMcf/d of expected natural gas production for the remainder of 2018, using a variety of structures.
On July 31, 2018, the Board of Directors declared a dividend of $0.015 per common share payable on September 28, 2018 to common shareholders of record as of September 14, 2018.
Second Quarter Highlights
|(for the period ended June 30)|
|NGLs – Plant Condensate (Mbbls/d)||33.7||22.8||48|
|NGLs – Other (Mbbls/d)||37.0||24.7||50|
|Oil and NGLs Total (Mbbls/d)||155.3||124.9||24|
|Natural gas (MMcf/d)||1,095||1,146||(4)|
|Total production (MBOE/d)||337.9||316.0||7|
|Liquids and natural gas prices|
|Q2 2018||Q2 2017|
|Encana realized liquids prices1|
|NGLs – Plant Condensate||54.48||47.33|
|NGLs – Other||23.77||17.15|
|Encana realized natural gas price1 ($/Mcf)||3.03||2.56|
1 Prices include the impact of realized gain (loss) on risk management.
|Non-GAAP Cash Flow Reconciliation|
| (for the period ended June 30) |
($ millions, except as indicated)
|Q2 2018||Q2 2017|
|Cash from (used in) operating activities||475||218|
|Deduct (add back):|
|Net change in other assets and liabilities||(5)||(4)|
|Net change in non-cash working capital||(106)||(129)|
|Current tax on sale of assets||-||-|
|Non-GAAP cash flow1||586||351|
|Divided by Production Volumes (MMBOE)||30.7||28.8|
|Non-GAAP cash flow margin1 ($/BOE)||19.09||12.19|
Non-GAAP Operating Earnings Reconciliation
|Net earnings (loss)||(151)||331|
|Before-tax (addition) deduction:|
|Unrealized gain (loss) on risk management||(326)||110|
|Non-operating foreign exchange gain (loss)||(32)||63|
|Gain (loss) on divestiture||1||-|
|After-tax (addition) deduction||(349)||151|
|Non-GAAP operating earnings 1||198||180|
1 Non-GAAP cash flow, non-GAAP cash flow margin and non-GAAP operating earnings (loss) are non-GAAP measures as defined in Note 1.