DBRS Confirms EnCana Long-Term Ratings at A (low), Stable Trends

DBRS has today confirmed the Unsecured Senior Notes and the Medium-Term Notes & Debentures of EnCana Corporation (New EnCana or the Company) and the Unsecured Long-Term Notes of EnCana Holdings Finance Corp. (Finance) at A (low), all with Stable trends. New EnCana’s Commercial Paper rating of R-1 (low) has also been confirmed. The rating actions follow the closing today of the spin-off (the Transaction) of the Company’s Integrated Oil and Canadian Plains divisions into a new entity, Cenovus Energy Inc. (Cenovus). This removes the Company’s long-term ratings from Under Review with Developing Implications, where these were placed on May 12, 2008, and maintained on September 10, 2009 (see separate press releases), when the Transaction was announced.

As noted in DBRS’s press release of September 10, 2009, the Transaction was not expected to result in downgrades to the Company’s ratings, should it proceed as expected. The rating confirmations also reflect, as of the Transaction’s closing, the Company’s satisfactory capital structure, which is in line with its current credit metric targets (which are similar to those maintained pre-Transaction), with liquidity arrangements commensurate with its capital growth requirements. Free cash flow was used to pay down short-term debt. In addition, the rating actions are based on DBRS’s expectation and management’s commitment that future capital investment programs, share repurchases and other related activities will be managed within the context of current target metrics and that other key financial principles, such as hedging policies, will remain in place. The metric targets include a debt-to-capital ratio of 30% to 40% and a debt-to-EBITDA ratio of 1.0 times to 2.0 times. Post-Transaction, in view of the increased concentration risk as a pure play natural gas company (94% pro forma production versus 82% pre-Transaction), DBRS expects the Company to manage within the lower half of these ranges in order to maintain financial flexibility for the current ratings.

Post-Transaction, the Company’s debt-to-cash flow could exceed 2.0 times on a temporary basis should the current low natural gas prices persist throughout 2010. However, any temporary aberration due to unusually weak gas prices should not have rating implications, provided that remedial measures are taken to address the issue. These ratios should also improve as production ramps up as planned over time and natural gas prices rise to more sustainable levels. DBRS estimates pro forma debt-to-capital of approximately 33% (20% net of cash) and debt-to-EBITDA of 1.2 times (0.6 times net) and debt-to-cash flow of 1.5 times (0.8 times net) based on September 30, 2009 operating results and receipt of about $3.5 billion in cash from Cenovus on closing. Post-Transaction, New EnCana will initially maintain a 50% share of former EnCana’s dividend of $1.60 per share annually.

Despite the increased concentration risk mentioned above, the Company’s asset portfolios are fairly diverse within North America, consisting of early life, diversified natural gas resource plays fairly equally split between Canada and the United States in major gas basins in the Canadian Foothills, the Rockies and Texas. The Company also benefits from operational expertise, with one of the lowest cost structures, and its capital discipline, which should help it weather a lower gas pricing environment. The New EnCana, with approximately two-thirds of the former entity’s production volumes of approximately 3.5 billion cubic feet per day (close to 585,000 barrels of oil equivalent per day (boe/d)) and proved reserves of 2.2 billion boe at December 31, 2008, remains among the largest independents in North America. Furthermore, hedges in place covering about half of its gas production in 2010, at slightly more than $6 per thousand cubic feet, should provide a measure of stability to earnings and cash flow.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The Unsecured Long-Term Notes of EnCana Holdings Finance Corp. are guaranteed by EnCana Corporation.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.

This is a Corporate (Energy) rating.