DBRS Confirms Encana Corp. ratings at A (low) and R-1 (low), Stable Trends

DBRS has today confirmed the ratings of the Unsecured Senior Notes and the Medium-Term Notes & Debentures of Encana Corporation (Encana or the Company) and the Unsecured Long-Term Notes of Encana Holdings Finance Corp. (Finance) at A (low) with Stable trends. Finance’s rating is based on the guarantee of Encana. DBRS has also confirmed the Commercial Paper rating of Encana at R-1 (low) with a Stable trend.

The rating confirmations follow the Company’s announcement that it has signed a Co-operation Agreement with PetroChina International Investment Company Limited (PCI), a subsidiary of PetroChina Company Limited for the transaction outlined in more detail below for consideration of approximately CAD5.4 billion related to its Cutbank Ridge natural gas assets (the Transaction). DBRS believes the Transaction, which compares favourably with other recent transactions, will have a modestly positive impact on Encana’s credit metrics near term, and will enhance its natural gas development efforts in a relatively weak natural gas pricing environment. However, DBRS expects the Company’s planned share repurchases, as part of its stated balanced approach to deploy the anticipated proceeds for additional capital investment and maintaining financial flexibility and liquidity, will not compromise its conservative financial profile in order to maintain its current credit ratings. In view of the Company’s concentration risk as a pure play natural gas company currently in a low cycle for natural gas, DBRS also expects the Company to manage its share buyback efforts within the confines of the lower half of its credit metric targets, principally debt-to-capital ratio of less than 40% (30% to 40% as expected by DBRS – approximately 31% at December 31, 2010) and debt-to-EBITDA of less than 2.0 times (1.0 time to 2.0 times as expected by DBRS – approximately 1.6 times DBRS-adjusted), and a similar range for debt-to-cash flow of 1.0 time to 2.0 times (approximately 1.7 times) as expected by DBRS.

The Transaction primarily comprises the following: (1) PCI will pay CAD5.4 billion to acquire a 50% interest in the Company’s Cutbank Ridge business assets in British Columbia and Alberta, and (2) the two companies will establish a joint venture on 1.3 million net acres of related land to grow natural gas production in the years ahead. Encana will continue as the operator of the assets, whereas the joint venture will operate under the direction of a joint management committee likely equally represented by both companies. DBRS expects the two partners would contribute 50/50 to future development capital requirements. The economic adjustment date for the transaction is expected to be January 1, 2011 and the closing date is dependent on regulatory, Canadian and Chinese authorities and other approvals, as well as due diligence and the negotiation and execution of various transaction agreements, including the joint venture agreement.

The assets included in the Transaction represent less than 8% of Encana's current total production and reserves (total production of approximately 550,000 barrels of oil equivalent per day (boe/d) and estimated 2.4 billion boe of proved reserves at December 31, 2010). The majority of the value paid by PCI is expected to be associated with the value of the undeveloped resource potential and associated infrastructure. The latter includes on a 100% basis approximately 1.3 million acres of developed and undeveloped land. Encana had a total of over 13.6 million net acres of land in 2009.

Note:
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.