Encana (ECA, Financial) has quickly resized its organizational structure by optimizing its workforce by approximately 25% and gained nearly $150 million of sustainable capital, administrative and operating expenditure savings.
Encana invested about 86% of its 2014 capital in seven development assets and in line with its continued commitment to deliver superior margin production. Earlier in 2013, it had nearly 28 assets and continued to reduce them while delivering on its commitment. This key focus enabled it to generate approximately $400 million of free cash flow during 2014. Encana plans to strengthen this key focus in 2015 as well and invest approximately 95% of its capital on the development assets.
The planned optimization of the core assets by the company is believed to generate excellent cash flows and thus allow Encana to target other strategic investments, going forward.
Making smart moves
During 2014, Encana achieved about 50% decrease for drilling and concluding expenditure in the Duvernay on a year-over-year basis with 100% enhancement in the Montney in IP30s. Apart from solid optimization activities like field compression, plunger lift and gas lift, Encana successfully delivered two key well refracs in the play. It also recorded an oil production expansion on a per well basis of approximately 450 barrels per day on IP30.
Encana reported approximately 14% increase in the fiscal year 2014 cash flows on year-over-year basis although total production reduced by nearly 7%. At present, Encana is uniquely positioned with its acreage spread across the Duvernay, Montney, Eagle Ford and, Permian in the highly productive and profitable parts of the finest plays in North America.
Spending in the right areas
The significant reduction in the drilling and operating costs for several of the company’s key wells located strategically in the major basins across the North America is estimated to drive significant top line growth for the company and hence, improved shareholder returns.
Encana believes to invest approximately 80% of its overall 2015 capital in its major key assets including, the Duvernay, Montney, Eagle Ford and Permian. These four major assets are the finest-quality resources with significant margins at about $3 NYMEX gas price and a $50 WTI oil price.
Through the planned and focused allocation of the company’s highly strategic assets, it is forecasted that the overall production from Encana’s Duvernay, Montney, Eagle Ford and Permian assets would grow from an average of about 183,000 barrels a day during the fourth quarter of 2014 to a minimum of 240,000 barrels oil equivalent per day during the fourth quarter of 2015.
The major strategic allocation of the proceeds available from selling the non-strategic assets across the already robust portfolio of basins present with Encana is expected to significantly enhance the company’s production and therefore, superior profitability.
Moving ahead into 2015, Encana is focused on maintaining an investment grade credit rating with the three key rating agencies having confirmed mid-BBB rating for the stock post declaration of the strategic acquisition of Athlon.
Further, Encana is tactically managing the present debt levels by implementing a significant U.S. Commercial Paper schedule having $2 billion of entire capacity and hugely reducing the borrowing costs. Nearly $800 million of divestiture proceeds are estimated in the first quarter of 2015 including, approximately $450 million of already received proceeds.
The investment grade rating provided to Encana by three major rating agencies signify the robust growth strategy of the company, allowing it to invest into organic and inorganic growths while, reducing the non-strategic expenditures.
The overall capital allocation for the Permian during 2015 is estimated to be approximately $700 million. At present, Encana is operating six horizontal rigs and believe to average 4 to 6 horizontal rigs all through the year. It estimates to drill nearly 55 total horizontal wells in the Sprayberry and Wolfcamp. Also, Encana expects to run 46 vertical rigs in line with its rent commitments. Moreover, the net production in 2015 is estimated to average nearly 45,000 BOE per day.
In Gordondale, Encana tested lowered inter frac spacing which led to the early production of approximately 73% better than estimated compared to the initial 60 days. In Pipestone, Encana drilled and concluded 8 superior intensity operations during the second half of the year and these wells are forecasted to begin production during the beginning of 2015.
The continued planned drilling of the wells at the key identified locations of Encana is believed to uniquely position the company among its peers and attract solid investments into the stock.
In December 2014, Encana signed a strategic deal to divest a majority of its infrastructure in Cutbank Ridge, allowing it to explore the significant value from its current midstream infrastructure as enabling it to take forward the operatorship of prospective facility development. This key contract also allows Encana to redirect approximately $500 million of potential capital towards some key projects having enhanced rate of return drilling. Encana estimates to invest net of approximately $245 million and execute three key rigs in the Montney during 2015. Encana forecasts to drill approximately 25 total wells and deliver nearly 124,000 BOE per day total on an average.
Conclusion
Overall, the investors who already have the stock are advised to Sell Encana and the investors seeking investments into Encana are advised to avoid investments into the stock looking at the excessive stock overvaluation with the trailing P/E and forward P/E ratios of 3.06 and 50.00 respectively. The PEG ratio of 4.17, above 2 also signifies the stock’s overvaluation. However, the profit margin of 42.30% is attractive. Still, Encana is hugely debt-burdened with significant total debt of $7.87 billion against weaker total cash of $368.00 million only, restricting the company to plan for future growth investments.
