Encana Management Discusses Q2 2012 Results - Earnings Call Transcript

Encana (ECA)

Q2 2012 Earnings Call

July 25, 2012 1:00 pm ET

Executives

Ryder McRitchie - Vice President of Investor Relations

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

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

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

Eric Marsh

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

William A. Stevenson - Chief Accounting officer and Executive Vice-President

Analysts

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

Andrew Potter - CIBC World Markets Inc., Research Division

George Toriola - UBS Investment Bank, Research Division

Brian Singer - Goldman Sachs Group Inc., Research Division

Robert Brackett

Robert Bellinski - Morningstar Inc., Research Division

Philip R. Skolnick - Canaccord Genuity, Research Division

S. Ross Payne - Wells Fargo Securities, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Encana Corporation's Second Quarter 2012 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 expressed consent of Encana Corporation.

I would now like to turn the 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 second quarter results for 2012. 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 39 of Encana's Annual Information Form dated February 23, 2012, the latter of which is available on SEDAR.

In particular, I'd like to draw your attention to the material factors and assumptions in those advisories. Encana 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 after royalties unless otherwise noted.

In addition, in the first quarter of 2012, Encana adopted U.S. Generally Accepted Accounting Principles for financial reporting purposes, referred to as U.S. GAAP throughout this call. In 2011, the company prepared its financial statements in accordance with International Financial Reporting Standards referred to as IFRS. The adoption of U.S. GAAP has not had an impact on the company's operations, strategic decisions or cash flow. Full year 2011 and 2010 reconciliations between IFRS and U.S. GAAP are available in Note 27 to the company's annual consolidated financial statements prepared in accordance with IFRS.

In addition, the company has also prepared supplemental U.S. GAAP financial information, including Encana's 2011 annual consolidated financial statements and selected 2011 quarterly financial information, which is available on the company's website at www.encana.com.

Today, Randy Eresman, Encana's President and CEO, will speak to some highlights for the quarter and provide an update on Encana's outlook for the remainder of 2012 and into 2013. At the end of the prepared remarks, our leadership team will 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 today. On the financial side, during the second quarter of 2012, Encana continued to generate solid cash flow despite further downward pressure on NYMEX natural gas prices, which averaged $2.22 per million BTU, down over $2 from the same period in 2011. Encana's cash flow for the quarter was about $800 million supported by our strong risk management program and remains on track to meet our guidance for the year.

With respect to production, second quarter natural gas volumes of 2.8 billion cubic feet per day. In the Canadian division volumes were primarily -- were lower primarily due to shut-in production and divestitures, which were partially offset by our successful drilling programs at Bighorn and in the Peace River Arch area.

USA division, volumes were lower primarily due to shut-ins and curtailed production, divestitures and natural declines, partially offset by our successful drilling programs in the Piceance and Jonah. The majority of our activities in the Rockies are supported by historical joint venture arrangements.

Average oil and NGL -- average oil and natural gas liquid production volumes of about 28,000 barrels per day for the quarter increased by about 4,000 barrels per day from the same period in 2011. The increase in liquids production volumes was primarily due to increased royalty interest volumes and successful drilling programs in our Peace River Arch area. We estimated that natural gas liquid volumes would have been about 5,000 barrels per day higher had the deep cut portion of the Musreau plant not been down for repairs during the quarter. The third-party midstream plants is expected to be back online by the end of July.

We recently provided a comprehensive operational update at our Investor Day held at the end of June. As such, we will not be providing any further operational updates or new well results at this time.

Under U.S. GAAP full cost accounting, the carrying cost of Encana's natural gas and oil properties is subject to a ceiling test on a quarterly basis. In the second quarter, we recorded a $1.7 billion after-tax impairment charge against our net earnings. The ceiling test impairments primarily resulted from the decline in the 12-months-trailing natural gas prices. Given the current forward strip, we expect that further declines in the 12-month average trailing natural gas prices will likely result in the recognition of future U.S. GAAP ceiling test impairments. I'd like to highlight that the impairment charge is noncash in nature and is not reflective of the fair value of the assets. Of note, the company's DD&A rate was not impacted in the quarter due to the impairment charge, but will be on a going-forward basis.

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