DBRS Comments on Encana Corporation’s Termination of Negotiations with PetroChina

DBRS has noted that Encana Corporation (Encana or the Company) announced that it has ended exclusive negotiations with PetroChina International Investment Company, a subsidiary of PetroChina Company Limited, for a proposed joint venture regarding its Cutbank Ridge business assets (the Transaction). The two parties were unable to reach substantial alignment on the key elements of the Transaction, including the joint operating agreement, after close to a year of negotiations. DBRS believes that the termination of negotiations should not have any immediate rating implications, as outlined in more detail below. The Company’s intention to offer up portions of the undeveloped resources of the related assets to a variety of joint-venture opportunities through its usual competitive processes, and to assess separately a transaction for the midstream pipeline and processing assets in the area, could potentially reduce reliance on any one major joint-venture partner, as seen in the Company’s similar arrangements.

On February 10, 2011, DBRS confirmed Encana’s long-term ratings at A (low) with Stable trends (see separate press release), following the announced Transaction (proposed consideration of approximately C$5.4 billion), and felt that, in the near term, the Transaction would have a modestly positive impact on Encana’s credit metrics as well as enhance its natural gas development efforts in a relatively weak natural gas pricing environment. However, DBRS also cautioned on the potential use of proceeds for share buyback, besides supporting capital investments and financial flexibility.

Apart from the Cutbank Ridge assets, the Company has various other assets available for joint-venture/divestiture opportunities, including the undeveloped Horn River shale lands, the Greater Sierra resource play and producing assets in the northern portion of Greater Sierra. Excluding Cutbank Ridge, Encana continues to expect net divestiture proceeds of $1 billion to $2 billion (including joint-venture investments), which should be achievable based on past success in consummating transactions.

Proceeds from joint-venture/divestiture activities should help to partly mitigate the impact of the continued low natural gas prices, which have affected the Company’s performance for the rolling 12 months ended March 31, 2011; total debt-to-cash flow rose to 1.93 times, with total debt-to-capital at 32%. DBRS expects the Company to continue to manage its capital programs in order to maintain sufficient financial flexibility consistent with its current credit ratings. The Company has more than $4 billion available under its credit facility and has put in place hedges covering more than 50% of its forecast production in 2011 and 2012 at above market prices. It has demonstrated its ability to grow production and reserves and maintained one of the lowest cost structures in the industry during the past years. The Company’s supply cost is expected to average about $3.70 per thousand cubic feet (mcf) in 2011 and is targeted to be reduced to $3.00/mcf over the next three to five years (average NYMEX and AECO natural gas prices of $4.17/mcf and $3.70/mcf, respectively, for the past year).

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

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