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EnCana generates second quarter cash flow of US$2.9 billion, or $3.85 per share – up 16 percent
2008-07-24 05:00:00
EnCana generates second quarter cash flow of US$2.9 billion, or $3.85 per share – up 16 percent
Second quarter natural gas production up 10 percent to 3.8 billion
cubic
feet per day
Strong outlook for gas production growth and prices triggers increase
to
EnCana's 2008 forecast for cash flow and gas production
CALGARY, July 24 /EMWNews/ - EnCana Corporation (TSX &
NYSE: ECA) achieved strong increases in cash flow and operating earnings in
the second quarter of 2008 as a result of solid performance from the
company's North American portfolio of resource plays and substantial
increases in commodity prices.
"Once again our strong operating results demonstrate the substantial
value-creation capacity of our resource play strategy. Second quarter cash
flow per share and operating earnings per share increased 16 and 9 percent
respectively over last year while natural gas production is ahead of
expectations. Led by the East Texas, Jonah, Bighorn and Alberta coalbed
methane (CBM) resource plays, our low-risk portfolio of unconventional
resources continues to deliver sustainable growth across North America. In
the second quarter, the upstream business of our Integrated Oil division,
in particular, benefited from significantly higher field prices," said
Randy Eresman, EnCana's President & Chief Executive Officer.
EnCana expanding investments in North American resource portfolio
"With natural gas production growing faster than forecast and stronger
than expected prices, we are raising our 2008 cash flow forecast to a range
of $10 billion to $11 billion from a current level of $9.6 billion to $10
billion. Our full-year gas production forecast is also increasing to an
expected average of 3.85 Bcf/d. We are directing the higher than originally
forecast cash flows into growing our already strong position in the
Haynesville Shale in Louisiana, where recent test wells are demonstrating
very strong potential. At the same time, we are stepping up our divestiture
program for the remainder of the year to offset the additional costs of
expanding shale gas lands and resources," Eresman said.
Shale plays continue to show promise
"In the second quarter we announced an expansion of our sizeable
position in British Columbia's Horn River and Louisiana's Haynesville
natural gas shale plays. At Horn River, two of our recently completed wells
are producing at a very strong first-month average rate in excess of 5
million cubic feet per day (MMcf/d). At Haynesville, during a two-day test,
the initial flow rate of a second horizontal well was 15 MMcf/d. These well
results are exceptional and are a strong indication that the addition of
these plays has the potential to accelerate the pace of our natural gas
growth," Eresman said.
Integrated Oil production growth set to ramp up
"At Foster Creek, first production from our newest expansion phase,
which will add 30,000 bbls/d of gross production capacity, is expected to
start ramping up in the fourth quarter 2008. The next 30,000 bbls/d phase
is expected to be completed in the first quarter of 2009. Combined, these
two phases are scheduled to double our gross production capacity at Foster
Creek to 120,000 bbls/d. Production is forecast to begin ramping up later
this year and continue through 2009. At Christina Lake, we are steaming
wells in our recently completed expansion, which is expected to increase
our gross production capacity to 18,000 bbls/d by the end of the year, with
production ramping up through 2009," Eresman said.
"Plans for splitting EnCana into two strong independent companies
focused on distinct businesses - unconventional natural gas (GasCo) and
integrated oil (IOCo) - are proceeding well and we are working towards
completing the transaction early in 2009," Eresman said.
Second Quarter 2008 Highlights
------------------------------
(all year-over-year comparisons are to the second quarter of 2007)
Financial
- Cash flow increased 16 percent per share to $3.85, or $2.9 billion
- Operating earnings were up 9 percent per share to $1.96, or
$1.5 billion
- Net earnings were down 14 percent per share to $1.63, or
$1.2 billion, primarily due to unrealized mark-to-market losses on
risk management activities of $235 million after-tax compared to
gains of $47 million after-tax in 2007
- Operating cash flow generated from the Integrated Oil division
totalled $527 million, comprised of $185 million from the upstream
operations, a 59 percent increase due to strong field prices, and
$342 million from the downstream business, a decrease of 22 percent
due to weaker refining margins
- Capital investment was in line with guidance at $1.7 billion, up
about 47 percent in large part due to continued development of East
Texas and other key resource plays, as well as the expansion of the
company's upstream and downstream integrated oil capacity
- Free cash flow decreased $206 million to $1.2 billion (free cash flow
is defined in Note 1 on page 8)
- Realized natural gas prices were up 12 percent to $8.54 per thousand
cubic feet (Mcf) and realized liquids prices increased 99 percent to
$90.47 per barrel (bbl). These prices include the impact of financial
hedges
- EnCana purchased approximately 200,000 common shares at an average
share price of $74.81 under the Normal Course Issuer Bid, for a total
cost of $15 million.
Operating - Upstream
- Key resource play production was up 14 percent, with a 17 percent
increase in natural gas production and oil production down 9 percent
- Total natural gas production increased 10 percent to 3.8 billion
cubic feet per day (Bcf/d), up 11 percent per share
- Total oil and natural gas liquids (NGLs) production decreased 4
percent to approximately 128,000 barrels per day (bbls/d), down 3
percent per share
- Oil production at Foster Creek and Christina Lake was down 12 percent
to approximately 24,700 bbls/d (net to EnCana) due to an extended
turnaround in the second quarter at Foster Creek. Current net
production is about 30,000 bbls/d
- Operating and administrative costs of $1.71 per thousand cubic feet
equivalent (Mcfe) increased 46 percent from $1.17 per Mcfe one year
earlier. More than half of the increase was due to long-term
incentive costs and an appreciation of the Canadian dollar compared
to the U.S. dollar. When those items are factored out, operating and
administrative costs were in line with guidance of $1.40 per Mcfe.
The rest of the increase was due to reorganization costs, increased
activity levels and other administrative costs.
Operating - Downstream
- Refined products averaged 464,000 bbls/d (232,000 bbls/d net to
EnCana), up 10 percent
- Refinery crude utilization of 97 percent or 437,000 bbls/d crude
throughput (218,500 bbls/d net to EnCana), up 10 percent, from the
second quarter of 2007, due to a major turnaround and new coker
startup at the Borger refinery in June, 2007.
Guidance for total cash flow increases to a range of $10 billion to
$11 billion
Based on the company's strong cash flow performance to date and natural
gas production and commodity price expectations for the remainder of the
year, EnCana is increasing its 2008 guidance for total cash flow to a range
of $10 billion to $11 billion, or between $13.30 and $14.65 per share.
EnCana is also increasing its natural gas production forecast by 70 MMcf/d
to 3.85 Bcf/d, or 8 percent higher than 2007 gas production. Key gas
resource play production in 2008 is now expected to average 3.14 Bcf/d, up
60 MMcf/d. Production from the company's Foster Creek and Christina Lake
projects is now expected to average about 31,000 bbls/d, down about 3,000
bbls/d due to an unexpected power outage and an extended plant turnaround
in the second quarter at Foster Creek. As well, the company is planning a
more ambitious divestiture program. Proceeds from planned asset sales are
expected to offset additional land purchases in 2008, resulting in net
proceeds from acquisitions and divestitures of $500 million, which is in
line with guidance. Updated guidance is posted on the company's website
http://www.encana.com.
Managing costs through long-term drilling contracts
"As a result of higher commodity prices and increased activity, we are
seeing signs of cost inflation in services and materials - particularly for
steel and fuels, and we believe inflationary pressure may continue to climb
the rest of the year. EnCana has largely managed to offset inflationary
pressures to date through a series of long-term contracts. For example, we
have been working to lock in longer-term contracts for our well fracturing
services. The majority of these contracts are priced at current levels.
Significant portions of our steel requirements were contracted early so
that we have the benefit of those more favourable cost levels. Going
forward, we will continue to pursue cost management opportunities when
possible," Eresman said.
Key resource play natural gas production up 17 percent in second
quarter
Total natural gas production increased 10 percent in the second quarter
to 3.8 Bcf/d, driven by a 17 percent increase in EnCana's natural gas key
resource plays to 3.15 Bcf/d. In the U.S. increases were led by East Texas
at 127 percent as a result of drilling success as well as incremental
volumes from the Deep Bossier acquisition. In the Canadian Foothills
natural gas production was up 5 percent, with drilling success and new
facilities in the key resource plays of Bighorn in west central Alberta,
CBM in central Alberta and Cutbank Ridge straddling the British
Columbia-Alberta boundary.
Integrated Oil benefits from higher oil prices
Integrated Oil generated $527 million in operating cash flow, down
slightly from $557 million in the same quarter of 2007. The upstream
business benefited from a 138 percent increase in the average heavy oil
price to $93.64 per bbl at Foster Creek and Christina Lake. Operating cash
flow from the downstream business was impacted by significantly weaker
refining margins. Operating cash flow for the second quarter includes $172
million related to lower purchased product costs as a result of accounting
for inventory based on a first-in first-out valuation which is required
under Canadian generally accepted accounting principles. This inventory
valuation methodology results in lower product charges to operations in a
rising input cost environment. The Chicago 3-2-1 crack spread averaged
$13.60 per bbl in the quarter, down 55 percent from $30.12 per bbl from the
same period last year when crack spreads reached record levels as gasoline
inventories were drawn down to five-year lows. The weaker refining margins
were offset by the higher upstream pricing, which demonstrates the benefit
of the company's integration strategy. Second quarter oil production at
Foster Creek and Christina Lake was down 12 percent to about 24,700 bbls/d
(net to EnCana), primarily due to an extended scheduled turnaround at
Foster Creek. Current net production is approximately 30,000 bbls/d.
IMPORTANT NOTE: Effective January 2, 2007, EnCana established an
integrated oil business with ConocoPhillips, which resulted in EnCana
contributing its interests in Foster Creek and Christina Lake into an
upstream partnership owned 50-50 by the two companies. Production and
wells drilled from 2006 have been adjusted on a pro forma basis to
reflect the integrated oil transaction. Per share amounts for cash flow
and earnings are on a diluted basis. EnCana reports in U.S. dollars
unless otherwise noted and follows U.S. protocols, which report
production, sales and reserves on an after-royalties basis. The
company's
financial statements are prepared in accordance with Canadian generally
accepted accounting principles (GAAP).
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Financial Summary - Total Consolidated
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(for the six months
ended June 30) 6 6
($ millions, except Q2 Q2 % months months %
per share amounts) 2008 2007 change 2008 2007 change
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Cash flow(1) 2,889 2,549 +13 5,278 4,301 +23
Per share diluted 3.85 3.33 +16 7.02 5.56 +26
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Operating earnings(1) 1,469 1,369 +7 2,514 2,219 +13
Per share diluted 1.96 1.79 +9 3.34 2.87 +16
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Net earnings 1,221 1,446 -16 1,314 1,943 -32
Per share diluted 1.63 1.89 -14 1.75 2.51 -30
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Earnings Reconciliation Summary - Total Consolidated
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Net earnings (loss) 1,221 1,446 1,314 1,943
(Add back losses &
deduct gains) (235) 47 (972) (376)
Unrealized mark-to-market
hedging gain (loss),
after-tax (13) (7) (228) 4
Non-operating foreign
exchange gain (loss),
after-tax Gain (loss) on
discontinuance, after-tax - - - 59
Future tax recovery due
to tax rate reductions - 37 - 37
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Operating earnings(1) 1,469 1,369 +7 2,514 2,219 +13
Per share diluted 1.96 1.79 +9 3.34 2.87 +16
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(1) Cash flow and operating earnings are non-GAAP measures as defined in
Note 1 on Page 8.
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Production & Drilling Summary
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Total Consolidated
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(for the six months 6 6
ended June 30) Q2 Q2 % months months %
(After royalties) 2008 2007 change 2008 2007 change
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Natural Gas (MMcf/d) 3,841 3,506 +10 3,787 3,454 +10
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Natural gas production
per 1,000 shares (Mcf) 466 421 +11 919 819 +12
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Oil and NGLs (Mbbls/d) 128 133 -4 132 132 -
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Oil and NGLs production
per 1,000 shares (Mcfe) 93 96 -3 193 188 +3
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Total Production (MMcfe/d) 4,607 4,306 +7 4,582 4,246 +8
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Total per 1,000 shares
(Mcfe) 559 517 +8 1,112 1,007 +10
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Net wells drilled 409 569 -28 1,552 1,833 -15
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Growth from key North American resource plays
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Resource Play Daily Production
------------------------------------------------------------
2008 2007 2006
------------------------------------------------------------
(After Full Full
royalties) YTD Q2 Q1 Year Q4 Q3 Q2 Q1 Year
-------------------------------------------------------------------------
Natural Gas (MMcf/d)
Jonah 613 630 595 557 612 588 523 504 464
Piceance 377 383 372 348 351 354 349 334 326
East
Texas 294 316 273 143 187 144 139 103 99
Fort
Worth 138 137 140 124 138 128 124 106 101
Greater
Sierra 211 219 205 211 221 220 219 186 213
Cutbank
Ridge(1) 275 280 271 258 283 269 248 232 189
Bighorn(1) 158 170 146 126 136 136 122 109 97
CBM 300 303 298 259 283 256 245 251 194
Shallow
Gas 713 712 715 726 727 713 729 735 739
-------------------------------------------------------------------------
Total natural
gas(1)
(MMcf/d) 3,079 3,150 3,015 2,752 2,938 2,808 2,698 2,560 2,422
-------------------------------------------------------------------------
Oil (Mbbls/d)
Foster
Creek 24 21 27 24 25 26 25 20 18
Christina
Lake 3 4 2 3 2 3 3 3 3
Pelican
Lake 23 21 24 23 24 24 23 23 24
Weyburn(2) 14 13 14 15 14 15 14 15 15
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Total oil
(Mbbls/d)(2) 64 59 67 65 65 68 65 61 60
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Total
(MMcfe/d)
(1),(2) 3,464 3,506 3,417 3,142 3,328 3,210 3,088 2,926 2,782
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% change
from prior
period +2.6 +2.7 +12.9 +3.7 +4.0 +5.5 +9.2
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(1) Key resource play production volumes in 2007 and 2006 for Cutbank
Ridge and Bighorn were restated to include the addition of new areas
and zones that now qualify for key resource play inclusion based on
EnCana's internal criteria.
(2) Total key resource play production volumes in 2007 and 2006 were
restated in the first quarter of 2008 to include the designation of
Weyburn as an oil key resource play.
Drilling activity in key North American resource plays
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Resource Play Net Wells Drilled
------------------------------------------------------------
2008 2007 2006
------------------------------------------------------------
Full Full
YTD Q2 Q1 Year Q4 Q3 Q2 Q1 Year
-------------------------------------------------------------------------
Natural Gas
Jonah 92 49 43 135 23 31 42 39 163
Piceance 164 81 83 286 77 72 72 65 220
East Texas 33 22 11 35 8 9 11 7 59
Fort Worth 41 20 21 75 15 17 29 14 97
Greater
Sierra 63 27 36 109 27 27 32 23 115
Cutbank
Ridge(1) 48 24 24 93 11 23 26 33 134
Bighorn(1) 48 18 30 62 6 18 10 28 58
CBM 261 10 251 1,079 330 323 18 408 729
Shallow
Gas 579 83 496 1,914 649 608 241 416 1,310
-------------------------------------------------------------------------
Total gas
wells(1) 1,329 334 995 3,788 1,146 1,128 481 1,033 2,885
-------------------------------------------------------------------------
Oil
Foster
Creek 13 1 12 23 6 8 1 8 3
Christina
Lake - - - 3 - 1 2 - 1
Pelican
Lake - - - - - - - - -
Weyburn(2) 14 5 9 37 10 9 9 9 35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total oil
wells(2) 27 6 21 63 16 18 12 17 39
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Total
(1),(2) 1,356 340 1,016 3,851 1,162 1,146 493 1,050 2,924
-------------------------------------------------------------------------
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(1) Key resource play net wells drilled in 2007 and 2006 for Cutbank
Ridge and Bighorn were restated to include the addition of new areas
and zones that now qualify for key resource play inclusion based on
EnCana's internal criteria.
(2) Total key resource play net wells drilled in 2007 and 2006 were
restated in the first quarter of 2008 to include the designation of
Weyburn as an oil key resource play.
Natural gas shale resource play update
EnCana announced on June 16, 2008 that it has established a leading
land and resource position in the Horn River Shale in northeast British
Columbia and the Haynesville Shale in Louisiana and Texas. EnCana has
drilled several exploration wells that have shown strong potential to
deliver commercial volumes of natural gas. At Horn River, two of EnCana's
recently completed wells are producing at a very strong first-month average
rate in excess of 5 MMcf/d. In the Haynesville Shale play, EnCana has early
results from its second horizontal well, which flowed at an initial two-day
rate of 15 MMcf/d. In the second quarter EnCana increased its leased
acreage in the Haynesville Shale play to 370,000 net acres through a series
of transactions. The company also reached an agreement in July, 2008 to
acquire an additional 89,000 acres of mineral rights from Indigo Minerals
LLC for $457 million.
Second quarter 2008 natural gas and oil prices
-------------------------------------------------------------------------
6 6
Q2 Q2 % months months %
2008 2007 change 2008 2007 change
-------------------------------------------------------------------------
Natural gas ($/Mcf)
NYMEX 10.93 7.55 +45 9.48 7.16 +32
EnCana realized gas
price(1) 8.54 7.62 +12 8.29 7.43 +12
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Oil and NGLs ($/bbl)
WTI 123.80 65.02 +90 111.12 61.68 +80
Western Canadian Select
(WCS) 102.18 45.84 +123 89.58 43.85 +104
Differential WTI/WCS 21.62 19.18 +13 21.54 17.83 +21
EnCana realized liquids
price(1) 90.47 45.47 +99 79.77 44.02 +81
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Chicago 3-2-1 crack
spread ($bbl) 13.60 30.12 -55 10.65 21.51 -50
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(1) Realized prices include the impact of financial hedging.
Price risk management
Risk management positions at June 30, 2008 are presented in Note 17 to
the unaudited Interim Consolidated Financial Statements. In the second
quarter of 2008, EnCana's commodity price risk management measures resulted
in realized losses of approximately $400 million after-tax, composed of a
$308 million after-tax loss on gas hedges, and a $92 million after-tax loss
on oil and other hedges. The realized losses in the second quarter reflect
the dramatic increase in oil prices in the past year and natural gas prices
over the past few months compared to the portion of EnCana's sales that are
hedged at fixed prices - a risk management strategy that is aimed at
providing more certainty of cash flow to fund the company's annual capital
investment program. EnCana has hedged about 1.5 Bcf/d of expected 2008 gas
production for the balance of the year at an average NYMEX equivalent price
of $8.20 per Mcf. EnCana has about 23,000 bbls/d of expected 2008 oil
production hedged for the balance of the year under fixed price contracts
at an average West Texas Intermediate (WTI) price of $70.13 per bbl. For
2009, EnCana has 391 MMcf/d of its expected natural gas production under
fixed price contracts at an average NYMEX equivalent price of $9.85 per Mcf
and 341 MMcf/d under NYMEX put options at an average strike of $8.85 per
Mcf.
U.S. Rockies and Canadian basis differential hedges
North American natural gas prices are impacted by volatile pricing
disconnects caused primarily by transportation constraints between
producing regions and consuming regions. These price discounts are called
basis differentials. EnCana has hedged 100 percent of its expected U.S.
Rockies basis exposure in 2008 using a combination of downstream
transportation and basis hedges, including some hedges that are based on a
percentage of NYMEX prices. At June 30, 2008, U.S. basis hedges, a
combination of Rockies, Mid- Continent and San Juan instruments, had an
effective average differential to NYMEX of $1.66 per Mcf for the rest of
2008. EnCana has also hedged about 8 percent of its expected 2008 Canadian
gas production at an average AECO basis differential of 76 cents per Mcf.
Corporate developments
----------------------
Quarterly dividend of 40 cents per share declared
EnCana's Board of Directors has declared a quarterly dividend of 40
cents per share payable on September 30, 2008 to common shareholders of
record as of September 15, 2008. Based on the July 23, 2008 closing share
price on the New York Stock Exchange of $72.62, this represents an
annualized yield of about 2.2 percent.
Corporate reorganization to create two energy companies focused on
unconventional resources
On May 11, 2008, EnCana announced plans to split into two highly
focused energy companies - one a North American natural gas company and the
other a fully integrated oil company with in-situ oil properties and
refineries supplemented by reliable production from natural gas and crude
oil resource plays. The proposed corporate reorganization, expected to
close in early 2009, would be implemented through a Plan of Arrangement and
is subject to shareholder and court approval. An information circular
setting out the details of the Plan of Arrangement is expected to be mailed
to EnCana shareholders in November, followed by a shareholders meeting
planned for mid December. The working names of the two companies are GasCo
and IOCo. GasCo will retain the name of EnCana Corporation while the
permanent name of IOCo will be determined prior to the close of the
transaction. For further information on the announcement see the company's
website http://www.encana.com.
Normal Course Issuer Bid
In the second quarter of 2008, EnCana purchased for cancellation
approximately 200,000 common shares at an average price of $74.81 per share
under the company's Normal Course Issuer Bid for a total cost of $15
million. As a result of the proposed corporate reorganization, the company
has suspended further purchases for 2008.
Financial strength
------------------
EnCana maintains a strong balance sheet, targeting a net debt-to-
capitalization ratio between 30 and 40 percent and a net debt-to-adjusted-
EBITDA multiple, on a trailing 12-month basis, of 1 to 2 times. At June 30,
2008, EnCana's net debt-to-capitalization ratio was 36 percent, including
mark- to-market losses on risk management instruments, which increased net
debt. Excluding this mark-to-market impact, the net debt-to-capitalization
ratio would have been 34 percent. EnCana's net debt-to-adjusted-EBITDA
multiple, on a trailing 12-month basis, was 1.3 times at the end of the
second quarter. The company expects to be in the lower end of its managed
ranges by year-end.
In the quarter, EnCana invested $1.7 billion in capital, excluding
acquisitions and divestitures, on continued development of its key resource
plays and expansion of the company's downstream heavy oil processing
capacity through its joint venture with ConocoPhillips.
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CONFERENCE CALL TODAY
11 a.m. Mountain Time (1 p.m. Eastern Time)
EnCana Corporation will host a conference call today, Thursday, July 24,
2008, starting at 11 a.m. MT (1 p.m. ET). To participate, please dial
(866) 321-6651 (toll-free in North America) or (416) 642-5212 and quote
confirmation code 7198404 approximately 10 minutes prior to the
conference call. An archived recording of the call will be available from
approximately 3 p.m. MT on July 24 until midnight July 31, 2008 by
dialling (888) 203-1112 or (647) 436-0148 and entering access
code 7198404.
A live audio webcast of the conference call will also be available via
EnCana's website, http://www.encana.com, under Investor Relations. The webcast
will be archived for approximately 90 days.
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NOTE 1: Non-GAAP measures
This news release contains references to cash flow, operating earnings,
free cash flow, net debt, capitalization and adjusted earnings before
interest, tax, depreciation and amortization (EBITDA).
- Cash flow is a non-GAAP measure defined as cash from operating
activities excluding net change in other assets and liabilities, net
change in non-cash working capital from continuing operations and net
change in non-cash working capital from discontinued operations.
- Operating earnings is a non-GAAP measure that shows net earnings
excluding non-operating items such as the after-tax impacts of a
gain/loss on discontinuance, the after-tax gain/loss of unrealized
mark-to-market accounting for derivative instruments, the after-tax
gain/loss on translation of U.S. dollar denominated debt issued from
Canada and the partnership contribution receivable, the after-tax
foreign exchange gain/loss on settlement of intercompany
transactions, future income tax on foreign exchange related to U.S.
dollar intercompany debt recognized for tax purposes only, and the
effect of changes in statutory income tax rates. Management believes
that these excluded items reduce the comparability of the company's
underlying financial performance between periods. The majority of
U.S. dollar debt issued from Canada has maturity dates in excess of
five years.
- Free cash flow is a non-GAAP measure that EnCana defines as cash flow
in excess of capital investment, excluding net acquisitions and
divestitures, and is used to determine the funds available for other
investing and/or financing activities.
- Net debt is a non-GAAP measure defined as long-term debt plus current
liabilities less current assets. Capitalization is a non-GAAP measure
defined as net debt plus shareholders' equity. Net debt to
capitalization and net debt to adjusted EBITDA are two ratios
management uses to steward the company's overall debt position as
measures of the company's overall financial strength.
- Adjusted EBITDA is a non-GAAP measure defined as net earnings from
continuing operations before gains or losses on divestitures, income
taxes, foreign exchange gains or losses, interest net, accretion of
asset retirement obligation, and depreciation, depletion and
amortization.
These measures have been described and presented in this news release
in order to provide shareholders and potential investors with additional
information regarding EnCana's liquidity and its ability to generate funds
to finance its operations.
EnCana Corporation
With an enterprise value of approximately $70 billion, EnCana is a
leading North American unconventional natural gas and integrated oil
company. By partnering with employees, community organizations and other
businesses, EnCana contributes to the strength and sustainability of the
communities where it operates. EnCana common shares trade on the Toronto
and New York stock exchanges under the symbol ECA.
ADVISORY REGARDING RESERVES DATA AND OTHER OIL AND GAS INFORMATION -
EnCana's disclosure of reserves data and other oil and gas information is
made in reliance on an exemption granted to EnCana by Canadian securities
regulatory authorities which permits it to provide such disclosure in
accordance with U.S. disclosure requirements. The information provided by
EnCana may differ from the corresponding information prepared in accordance
with Canadian disclosure standards under National Instrument 51-101 (NI 51-
101). EnCana's reserves quantities represent net proved reserves calculated
using the standards contained in Regulation S-X of the U.S. Securities and
Exchange Commission. Further information about the differences between the
U.S. requirements and the NI 51-101 requirements is set forth under the
heading "Note Regarding Reserves Data and Other Oil and Gas Information" in
EnCana's Annual Information Form.
In this news release, certain crude oil and NGLs volumes have been
converted to cubic feet equivalent (cfe) on the basis of one barrel (bbl)
to six thousand cubic feet (Mcf). Also, certain natural gas volumes have
been converted to barrels of oil equivalent (BOE) on the same basis. BOE
and cfe may be misleading, particularly if used in isolation. A conversion
ratio of one bbl to six Mcf is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent value
equivalency at the well head.
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS - In the interests of
providing EnCana shareholders and potential investors with information
regarding EnCana, including management's assessment of EnCana's and its
subsidiaries' future plans and operations, certain statements contained in
this news release are forward-looking statements or information within the
meaning of applicable securities legislation, collectively referred to
herein as "forward-looking statements." Forward-looking statements in this
news release include, but are not limited to: projections relating to
future economic and operating performance (including per share growth, net
debt-to- capitalization and net debt-to-adjusted-EBITDA ratios, cash flow,
free cash flow, and cash flow per share); the anticipated ability to meet
the company's guidance forecasts; anticipated growth and success of various
resource plays and the expected characteristics of such resource plays; the
future drilling and production potential for various regions, including
East Texas and the Horn River and Haynesville natural gas shale plays;
projections relating to the proposed corporate reorganization transaction,
including the expected timing for mailing an information circular to
shareholders, holding a shareholders meeting and the potential closing
date; projections of crude oil and natural gas prices, including basis
differentials for various regions; anticipated expansion and production at
Foster Creek and Christina Lake; projections for future crack spreads and
refining margins; anticipated effects of EnCana's market risk mitigation
strategy; projections for 2008 capital expenditures and investment;
projections for oil, natural gas and NGLs production in 2008 and beyond;
anticipated costs and inflationary pressures; and potential divestitures,
proceeds which may be generated there from and the potential use of such
proceeds. Readers are cautioned not to place undue reliance on
forward-looking statements, as there can be no assurance that the plans,
intentions or expectations upon which they are based will occur. By their
nature, forward- looking statements involve numerous assumptions, known and
unknown risks and uncertainties, both general and specific, that contribute
to the possibility that the predictions, forecasts, projections and other
forward-looking statements will not occur, which may cause the company's
actual performance and financial results in future periods to differ
materially from any estimates or projections of future performance or
results expressed or implied by such forward-looking statements. These
risks and uncertainties include, among other things: volatility of and
assumptions regarding oil and gas prices; assumptions based upon the
company's current guidance; fluctuations in currency and interest rates;
product supply and demand; market competition; risks inherent in the
company's marketing operations, including credit risks; imprecision of
reserves estimates and estimates of recoverable quantities of oil, natural
gas and liquids from resource plays and other sources not currently
classified as proved reserves; the ability of the company and
ConocoPhillips to successfully manage and operate the integrated North
American oil business and the ability of the parties to obtain necessary
regulatory approvals; refining and marketing margins; potential disruption
or unexpected technical difficulties in developing new products and
manufacturing processes; potential failure of new products to achieve
acceptance in the market; unexpected cost increases or technical
difficulties in constructing or modifying manufacturing or refining
facilities; unexpected difficulties in manufacturing, transporting or
refining synthetic crude oil; risks associated with technology; the
company's ability to replace and expand oil and gas reserves; its ability
to generate sufficient cash flow from operations to meet its current and
future obligations; its ability to access external sources of debt and
equity capital; the timing and the costs of well and pipeline construction;
the company's ability to secure adequate product transportation; changes in
royalty, tax, environmental and other laws or regulations or the
interpretations of such laws or regulations; political and economic
conditions in the countries in which the company operates; the risk of war,
hostilities, civil insurrection and instability affecting countries in
which the company operates and terrorist threats; risks associated with
existing and potential future lawsuits and regulatory actions made against
the company; and other risks and uncertainties described from time to time
in the reports and filings made with securities regulatory authorities by
EnCana. Although EnCana believes that the expectations represented by such
forward-looking statements are reasonable, there can be no assurance that
such expectations will prove to be correct. Readers are cautioned that the
foregoing list of important factors is not exhaustive.
Forward-looking information respecting anticipated 2008 cash flow,
operating cash flow and pre-tax cash flow for EnCana, and for GasCo and
IOCo pro-forma the proposed reorganization transaction, is based upon
achieving average production of oil and gas for 2008 as set out above,
average commodity prices for 2008 based on actual results for the second
quarter of 2008, and for the balance of 2008, a WTI price of $130/bbl for
oil, a NYMEX price of $11.00/Mcf for natural gas, an average U.S./Canadian
dollar foreign exchange rate of $0.98, an average Chicago crack spread for
2008 of $10.00/bbl for refining margins, and an average number of
outstanding shares for EnCana of approximately 750 million. Assumptions
relating to forward-looking statements generally include EnCana's current
expectations and projections made by the company in light of, and generally
consistent with, its historical experience and its perception of historical
trends, as well as expectations regarding rates of advancement and
innovation, generally consistent with and informed by its past experience,
all of which are subject to the risk factors identified elsewhere in this
document.
Furthermore, the forward-looking statements contained in this news
release are made as of the date of this news release, and, except as
required by law, EnCana does not undertake any obligation to update
publicly or to revise any of the included forward-looking statements,
whether as a result of new information, future events or otherwise. The
forward-looking statements contained in this news release are expressly
qualified by this cautionary statement.
Further information on EnCana Corporation is available on the company's
website, http://www.encana.com. For EnCana video, visit
http://www.thenewsmarket.com/EnCana. Free delivery options include digital FTP
transfer, Beta SP tape, Data-DVD and streaming download (Flash, QuickTime
and Windows Media).
EnCana Corporation
Interim Consolidated Financial Statements
(unaudited)
For the period ended June 30, 2008
(U.S. Dollars)
CONSOLIDATED STATEMENT OF EARNINGS (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
($ millions, except per ----------------------------------------
share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
REVENUES, NET OF
ROYALTIES (Note 5) $ 7,321 $ 5,613 $ 12,663 $ 10,049
EXPENSES (Note 5)
Production and mineral
taxes 154 57 268 149
Transportation and
selling 326 234 646 512
Operating 709 565 1,405 1,116
Purchased product 2,882 1,836 5,275 3,687
Depreciation, depletion
and amortization 1,097 899 2,132 1,742
Administrative 225 95 381 190
Interest, net (Note 7) 147 94 281 195
Accretion of asset
retirement obligation (Note 12) 20 15 41 29
Foreign exchange (gain)
loss, net (Note 8) (35) 7 60 (5)
(Gain) loss on
divestitures (Note 6) (17) 1 (17) (58)
-------------------------------------------------------------------------
5,508 3,803 10,472 7,557
-------------------------------------------------------------------------
NET EARNINGS BEFORE INCOME TAX 1,813 1,810 2,191 2,492
Income tax expense (Note 9) 592 364 877 549
-------------------------------------------------------------------------
NET EARNINGS $ 1,221 $ 1,446 $ 1,314 $ 1,943
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET EARNINGS PER
COMMON SHARE (Note 16)
Basic $ 1.63 $ 1.91 $ 1.75 $ 2.54
Diluted $ 1.63 $ 1.89 $ 1.75 $ 2.51
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (unaudited)
Six Months Ended
June 30,
--------------------
($ millions) 2008 2007
-------------------------------------------------------------------------
RETAINED EARNINGS,
BEGINNING OF YEAR $ 13,082 $ 11,344
Net Earnings 1,314 1,943
Dividends on Common Shares (600) (304)
Charges for Normal Course
Issuer Bid (Note 13) (243) (1,421)
-------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 13,553 $ 11,562
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
NET EARNINGS $ 1,221 $ 1,446 $ 1,314 $ 1,943
OTHER COMPREHENSIVE INCOME,
NET OF TAX
Foreign Currency
Translation Adjustment 48 828 (352) 939
-------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 1,269 $ 2,274 $ 962 $ 2,882
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(unaudited)
Six Months Ended
June 30,
--------------------
($ millions) 2008 2007
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
BEGINNING OF YEAR $ 3,063 $ 1,375
Foreign Currency Translation Adjustment (352) 939
-------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
END OF PERIOD $ 2,711 $ 2,314
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEET (unaudited)
As at As at
June 30, December 31,
($ millions) 2008 2007
-------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 778 $ 553
Accounts receivable and
accrued revenues 3,346 2,381
Current portion of
partnership contribution
receivable 305 297
Risk management (Note 17) 265 385
Inventories (Note 10) 1,422 828
-------------------------------------------------------------------------
6,116 4,444
Property, Plant and
Equipment, net (Note 5) 37,070 35,865
Investments and Other Assets 654 607
Partnership Contribution Receivable 2,992 3,147
Risk Management (Note 17) 341 18
Goodwill 2,821 2,893
-------------------------------------------------------------------------
(Note 5) $ 49,994 $ 46,974
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable and
accrued liabilities $ 4,888 $ 3,982
Income tax payable 909 1,150
Current portion of
partnership contribution
payable 297 288
Risk management (Note 17) 1,617 207
Current portion of
long-term debt (Note 11) 491 703
-------------------------------------------------------------------------
8,202 6,330
Long-Term Debt (Note 11) 9,878 8,840
Other Liabilities 450 242
Partnership Contribution
Payable 3,012 3,163
Risk Management (Note 17) 73 29
Asset Retirement
Obligation (Note 12) 1,402 1,458
Future Income Taxes 6,160 6,208
-------------------------------------------------------------------------
29,177 26,270
-------------------------------------------------------------------------
Shareholders' Equity
Share capital (Note 13) 4,553 4,479
Paid in surplus - 80
Retained earnings 13,553 13,082
Accumulated other comprehensive income 2,711 3,063
-------------------------------------------------------------------------
Total Shareholders' Equity 20,817 20,704
-------------------------------------------------------------------------
$ 49,994 $ 46,974
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
($ millions) 2008 2007 2008 2007
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 1,221 $ 1,446 $ 1,314 $ 1,943
Depreciation, depletion
and amortization 1,097 899 2,132 1,742
Future income taxes (Note 9) 152 79 73 (111)
Unrealized (gain) loss
on risk management (Note 17) 318 (55) 1,411 559
Unrealized foreign
exchange (gain) loss (11) 79 65 76
Accretion of asset
retirement obligation (Note 12) 20 15 41 29
(Gain) loss on
divestitures (Note 6) (17) 1 (17) (58)
Other 109 85 259 121
Net change in other
assets and liabilities (171) (16) (264) 4
Net change in non-cash
working capital (722) (385) (1,260) (249)
-------------------------------------------------------------------------
Cash From Operating Activities 1,996 2,148 3,754 4,056
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (Note 5) (1,996) (1,189) (3,903) (2,679)
Proceeds from
divestitures (Note 6) 79 165 151 446
Net change in investments
and other (18) (25) (9) (6)
Net change in non-cash
working capital (101) (45) 191 (103)
-------------------------------------------------------------------------
Cash (Used in) Investing
Activities (2,036) (1,094) (3,570) (2,342)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Net issuance (repayment)
of revolving long-term debt 426 (40) 367 (40)
Issuance of long-term
debt (Note 11) - - 723 434
Repayment of long-term debt (196) - (196) -
Issuance of common
shares (Note 13) 13 77 76 153
Purchase of common
shares (Note 13) (15) (713) (326) (1,807)
Dividends on common
shares (300) (151) (600) (304)
Other - (14) - (3)
-------------------------------------------------------------------------
Cash From (Used in)
Financing Activities (72) (841) 44 (1,567)
-------------------------------------------------------------------------
FOREIGN EXCHANGE GAIN (LOSS) ON CASH AND CASH
EQUIVALENTS HELD IN
FOREIGN CURRENCY 1 5 (3) 6
-------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (111) 218 225 153
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 889 337 553 402
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 778 $ 555 $ 778 $ 555
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements (unaudited)
(All amounts in $ millions unless otherwise specified)
1. BASIS OF PRESENTATION
The interim Consolidated Financial Statements include the accounts of
EnCana Corporation and its subsidiaries ("EnCana" or the "Company"), and
are presented in accordance with Canadian generally accepted accounting
principles. EnCana's operations are in the business of exploration for,
and development, production and marketing of natural gas, crude oil and
natural gas liquids ("NGLs"), refining operations and power generation
operations.
The interim Consolidated Financial Statements have been prepared
following the same accounting policies and methods of computation as the
annual audited Consolidated Financial Statements for the year ended
December 31, 2007, except as noted below. The disclosures provided below
are incremental to those included with the annual audited Consolidated
Financial Statements. The interim Consolidated Financial Statements
should be read in conjunction with the annual audited Consolidated
Financial Statements and the notes thereto for the year ended
December 31, 2007.
2. CHANGES IN ACCOUNTING POLICIES AND PRACTICES
As disclosed in the December 31, 2007 annual audited Consolidated
Financial Statements, on January 1, 2008, the Company adopted the
following Canadian Institute of Chartered Accountants ("CICA") Handbook
Sections:
- "Inventories", Section 3031. The new standard replaces the previous
inventories standard and requires inventory to be valued on a
first-in, first-out or weighted average basis, which is consistent
with EnCana's former accounting policy. The new standard allows the
reversal of previous write-downs to net realizable value when there is
a subsequent increase in the value of inventories. The adoption of
this standard has had no material impact on EnCana's Consolidated
Financial Statements.
- "Financial Instruments - Presentation", Section 3863 and "Financial
Instruments - Disclosures", Section 3862. The new disclosure standard
increases EnCana's disclosure regarding the nature and extent of the
risks associated with financial instruments and how those risks are
managed (See Note 17). The new presentation standard carries forward
the former presentation requirements.
- "Capital Disclosures", Section 1535. The new standard requires EnCana
to disclose its objectives, policies and processes for managing its
capital structure (See Note 14).
3. RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 2009, EnCana will be required to adopt the CICA Handbook
Section 3064, "Goodwill and Intangible Assets", which will replace the
existing Goodwill and Intangible Assets standard. The new standard
revises the requirement for recognition, measurement, presentation and
disclosure of intangible assets. The adoption of this standard should not
have a material impact on EnCana's Consolidated Financial Statements.
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a
strategic plan for the direction of accounting standards in Canada. As
part of that plan, the AcSB confirmed in February 2008 that International
Financial Reporting Standards ("IFRS") will replace Canadian GAAP in 2011
for profit-oriented Canadian publicly accountable enterprises. As EnCana
will be required to report its results in accordance with IFRS starting
in 2011, the Company is assessing the potential impacts of this
changeover and developing its plan accordingly.
4. PROPOSED CORPORATE REORGANIZATION
On May 11, 2008, EnCana announced its plans to split into two highly
focused energy companies - one a North American natural gas company and
the other a fully integrated oil company with in-situ oilsands properties
and refineries supplemented by reliable production from various gas and
oil resource plays. The proposed corporate reorganization, expected to
close in early January 2009, would be implemented through a court
approved Plan of Arrangement and is subject to shareholder approval. The
reorganization would result in two publicly traded entities with every
EnCana shareholder receiving one share of each entity in exchange for
each EnCana common share held. The working names of the two companies are
GasCo and IntegratedOilCo ("IOCo") respectively. GasCo will retain the
name of EnCana Corporation while the permanent name of IOCo will be
determined prior to the close of the transaction.
5. SEGMENTED INFORMATION
As a result of the proposed corporate reorganization, EnCana has changed
its reportable segments to reflect the realigned reporting hierarchies.
The most significant change results in EnCana now presenting Canadian
Plains and Canadian Foothills as separate operating segments. These were
previously aggregated and presented in the Canada segment. Prior periods
have been restated to reflect the new presentation.
GasCo's operating segments will include EnCana's Canadian Foothills,
United States and Offshore and International segments. IOCo's operating
segments will include EnCana's Canadian Plains and Integrated Oil
segments.
The Company has defined its continuing operations into the following
segments:
- Canadian Plains, Canadian Foothills, United States and Offshore and
International segments include the Company's exploration for, and
development and production of natural gas, crude oil and NGLs and
other related activities. The majority of the Company's operations are
located in Canada and the United States. Offshore and International
exploration is mainly focused on opportunities in Atlantic Canada, the
Middle East and Europe.
- Integrated Oil is focused on two lines of business: the exploration
for, and development and production of bitumen in Canada using in-situ
recovery methods; and the refining of crude oil into petroleum and
chemical products located in the United States. This segment includes
EnCana's 50 percent interest in the joint venture with ConocoPhillips.
- Market Optimization is conducted by the Midstream & Marketing
division. The Marketing groups' primary responsibility is the sale of
the Company's proprietary production. The results are included in the
Canadian Plains, Canadian Foothills, United States and Integrated Oil
segments. Correspondingly, the Marketing groups also undertake market
optimization activities which comprise third-party purchases and sales
of product that provide operational flexibility for transportation
commitments, product type, delivery points and customer
diversification. These activities are reflected in t
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