Encana Corp. (NYSE, TSE: ECA) spent the first nine months of 2014 selling off assets, then ran up the score in a breakout third quarter.
Thanks to a strong A&D game, the company unlocked about $8 billion in value by selling lower-margin natural gas assets and buying higher-margin liquids. It bought a premier $3.1 billion position in the Eagle Ford Shale and has a $7.1 billion deal on the table for high-value Permian Basin properties owned by Athlon Energy Inc. (NYSE: ATHL).
Still, the burst of buying and selling produced mixed results in the quarter and may mean the company won’t come clearly into focus until next year.
Still, the Eagle Ford and Permian purchases fit into Encana’s aim of stockpiling liquids. The company’s third quarter pushed it two years ahead of its plans: Encana is on track to realizing 75% of operating cash flow from liquids production in 2015.
"The accelerated execution of our strategy has placed us in a position of strength," said Doug Suttles, Encana president and CEO. "We're building sustainable success from the inside-out with a culture built on teamwork, agility and the drive to succeed. Our team continues to take the concrete steps needed to deliver on our growth targets and drive efficiencies into everything we do.”
In June, Encana subsidiary Encana Oil & Gas (USA) Inc. completed the acquisition of about 45,500 net acres located in Karnes, Wilson and Atascosa counties, Texas, from Freeport-McMoRan (NYSE: FCX).
The company also referenced a land swap with EOG Resources Inc. (NYSE: EOG) that preserves about 140 operated future development wells. The company did not give additional details.
Encana has parlayed acquired assets with an expected netback of $55 per barrel of oil equivalent (boe) from divested assets with a netback of $20 per boe.
“To continue this momentum, management now needs to deliver operationally,” said Sameer Uplenchwar, senior analyst, Global Hunter Securities LLC.
Since buying into the Eagle Ford, Encana has lowered drilling costs by 25% and completions by 13%. Eagle Ford production is 45 Mboe/d (85% liquids).
The company expects free cash flow of $200-$250 million in 2014. Additionally, in early November, Encana added a fourth rig and plans to add another in December.
The Athlon deal is expected to close Nov. 13. It gives Encana a premier oil position in the Permian and the same performance challenges.
"We hit the ground running with a seamless transition into the Eagle Ford, demonstrating the agility of our teams in entering new basins as well as our ability to rapidly apply our operational expertise and integrate with existing asset teams,” Suttles said. “We are very confident that we will replicate our Eagle Ford success in the Permian once we complete the transaction and are able to combine our expertise with that of the Athlon team.”
The company also said in October it would sell the majority of Encana's Clearwater assets in Alberta for some $535.8 million (C$605 million). Closing is expected in the first quarter of 2015.
Encana’s strategy has so far increased company cash flow in the third quarter of 2014 to $807 million, or 22% year over year. Operating earnings were $281 million, an 87% increase.
However, the company came up short on some expectations.
“With A&D activity continuing and the growing pains that this brings, we have to wait for fiscal year 15 to get the first clean quarter,” Uplenchwar said. “By chasing accretive growth [value vs. volumes], ECA under Doug Suttles has reinvented itself over the past 12 months.”
Adjusting for the Athlon acquisition, “we see an oil/liquids production mix of about 50% pro forma in 2015 versus 10% at the end of 2013,” he said.
The company also noted that it reduced debt by $1 billion and has no further maturities until 2017. It also clipped upstream operating expense by $45 million, administrative expense by $30 million and capital costs by $70 million.
Year-to-date, the company has reported cash flow of about $2.6 billion and $3.2 billion in net earnings attributable to common shareholders, with the latter figure reflecting the significant impact of divestiture activity through the year. Encana's year-to-date operating earnings of $967 million represent a 68% increase compared to the first nine months of 2013.
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