Encana Management Discusses Q4 2011 Results - Earnings Call Transcript

Encana (ECA)

Q4 2011 Earnings Call

February 17, 2012 11:00 am ET

Executives

Ryder McRitchie - Vice President of Investor Relations

Randall K. Eresman - Chief Executive officer, President and Director

Michael G. McAllister - Executive Vice-President and Senior Vice-President of Canadian Division

Jeff E. Wojahn - Executive Vice President and President of USA Division

Sherri A. Brillon - Chief Financial officer and Executive Vice-President

Eric D. Marsh - Executive Vice-President and Interim President - Canadian Division

Renee E. Zemljak - Executive Vice President of Midstream Marketing & Fundamentals

Analysts

Andrew Potter - CIBC World Markets Inc., Research Division

Brian C. Dutton - Crédit Suisse AG, Research Division

Greg M. Pardy - RBC Capital Markets, LLC, Research Division

Mark Polak - Scotiabank Global Banking and Market, Research Division

Michael P. Dunn - FirstEnergy Capital Corp.

George Toriola - UBS Investment Bank, Research Division

Philip R. Skolnick - Canaccord Genuity, Research Division

Mark Gilman - The Benchmark Company, LLC, Research Division

Craig Shere - Tuohy Brothers Investment Research, Inc.

Robert Brackett

Brian Singer - Goldman Sachs Group Inc., Research Division

Robert S. Morris - Citigroup Inc, Research Division

Geoff Bird

Brett Bundale

Scott Haggett

Pat Roche

Jeremy van Loon

Presentation

Operator

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» Encana Corporation - Special Call
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» Encana Corporation - Special Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Encana Corporation's Fourth Quarter 2011 Conference Call. As a reminder, today's call is being recorded. [Operator Instructions] Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Encana Corporation. I would now like to turn the conference call over to Mr. Ryder McRitchie, Vice President of Investor Relations. Please go ahead, Mr. McRitchie.

Ryder McRitchie

Thank you, operator, and welcome, everyone, to our discussion of EnCana's fourth quarter and year-end results for 2011. Before we get started, I must refer you to the advisory on forward-looking statements contained in the news release, as well as the advisory on Page 36 of Encana's annual information form dated February 17, 2011, the latter of which is available on SEDAR. I'd like to draw your attention in particular to the material factors and assumptions in those advisories. In addition, please note that as of January 1, 2011, Encana adopted International Financial Reporting Standards for financial reporting purposes referred to as IFRS throughout this call. Prior to 2011, the company prepared its financial statements in accordance with Canadian Generally Accepted Accounting Principles, referred to as previous GAAP. The company reports its financial results in U.S. dollars. Accordingly, any reference to dollars, reserves, resources or production information in this call will be in U.S. dollars and U.S. protocols, unless otherwise noted. The adoption of IFRS has not had an impact on the company's operational and strategic decisions or cash flow. Reconciliations between previous GAAP and IFRS financial information can be found in the consolidated financial statements available on the company's website at www.encana.com.

Also, for your reference, 2011 reserves and economic contingent resources for each of our key resource plays, as well as our 2012 corporate guidance, have been posted to our website. Randy Eresman will start off this morning with the highlights from our 2011 operating results and year-end reserves position, as well as an overview of our 2012 capital program. Mike McAllister, Executive Vice President and acting President of our Canadian Division; and Jeff Wojahn, Executive Vice President and President of our USA division, will then touch on some highlights from each of their areas before turning the call over to Sherri Brillon, EnCana's Chief Financial Officer, to discuss EnCana's 2011 financial performance. Eric Marsh, Executive Vice President and Senior Vice President of the USA division, will then speak to some of the initiatives that Encana is pursuing to grow the demand for North American natural gas. Following some closing comments from Randy, our leadership team will then be available for questions.

I will now turn the call over to Randy Eresman, EnCana's President and CEO.

Randall K. Eresman

Thank you, Ryder, and thank you, everyone, for joining us. Lots to talk about this morning. I'm very pleased to be in a position to speak not only about our 2011 results and our 2012 budget, but also about the Cutbank Ridge Partnership agreement we've reached with Mitsubishi. The agreement we announced this morning with Mitsubishi Corporation to jointly develop our B.C. Cutbank Ridge undeveloped lands represents a major step forward in our plans to unlock the tremendous value contained in our asset base. Upon completion of the deal, which we expect to close later this month, Mitsubishi would invest CAD 2.9 billion for a 40% interest in the partnership, which holds about 409,000 net acres of undeveloped Montney natural gas lands in British Columbia. Encana will own 60% and Mitsubishi will own 40% of the partnership. Mitsubishi will pay approximately CAD 1.45 billion on closing and it will invest another CAD 1.45 billion in addition to its 40% of the partnership's future capital investment for a commitment period which is expected to be about 5 years, thereby reducing Encana's capital funding commitments to 30% of the total expected capital investment over that period.

The Cutbank Ridge Partnership is a great example of Encana's track record of creating value from grassroots. They identify high-quality, early-life resources, assemble large contiguous land positions, leverage technological advancements and apply innovative practices to develop these plays at some of the lowest costs in the industry. The result of these efforts is a deep portfolio of high-quality, low-cost assets which can be profitably developed for several decades. We first began assembling our sizable position in Cutbank Ridge over a decade ago, acquiring the majority of our land at an average cost of about $700 per acre. Our early-mover approach not only allowed us to acquire a low-cost position, but also enabled us to study the basin long before others and build our land position predominantly in the core of the resource. Since then, we have achieved a steady progression of improving cost structures by leveraging technology and continually optimizing all facets of the development process.

Today, Cutbank Ridge is one of the lowest-cost assets in our portfolio and our current production which is not included in this partnership, is nearly 600 million cubic feet per day. This transaction sets the foundation for accelerating the long-term development and value recognition of our undeveloped lands in the British Columbia portion of Cutbank Ridge, a major natural gas field capable of delivering a long-term affordable supply of natural gas to domestic and future export markets. We believe that the partnership we announced this morning with Mitsubishi crystallizes the value we identified at Cutbank Ridge over a decade ago, and further validates our strategy of building value from the ground up. The $2.9 billion investment by Mitsubishi reflects the value of a well-delineated world-class resource play that is being developed in a highly efficient manner. This partnership provides an excellent analogue for what we expect to achieve in several other plays throughout our portfolio. We continue to advance potential joint ventures in a number of other areas, both in Canada and in the United States.

In a normal price environment, this transaction would've accelerated Encana's overall pace of development as a result of the increased capital spending profile on these assets. However, in this lower natural gas price environment, we plan to more than offset the transaction’s near-term impact to North American natural gas production oversupply by reducing spending and production across our entire natural gas portfolio. I'll talk more about this in a minute.

I'm very proud of EnCana's strong operational performance during a year that was very difficult for natural gas producers. Throughout 2011, natural gas prices remain depressed, but Encana stayed true to our history of meeting our commitments. We delivered excellent operational results despite the low gas price and many cost and operational challenges reported by other operators. We made several advancements in our resource play hub development model with many of our resource plays now trending towards sub-$3 per MCF supply costs. Our low-cost structures were major factors in our ability to deliver solid cash flow and operating earnings in this low natural gas price environment.

At a company-wide level, we met our targets with respect to total production, cash flow and capital spending, while our operating costs and administrative expenses came in lower than our guidance. I believe these results underscore the quality of our asset base and the strength of our teams in delivering low-cost production. Our 2011 natural gas production of approximately 3.3 billion cubic feet per day was up 5% from 2010 and our oil and natural gas liquid production of about 24,000 barrels per day was also up 5% compared to 2010 volumes. On average, our natural gas production has a Btu content of about 1,060, which has provided a minor uplift to our average annualized price.

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