DBRS Publishes Report on Encana Corporation and Subsidiary

DBRS has today published a report on Encana Corporation (Encana or the Company) and Encana Holdings Finance Corp. Encana is currently undergoing a strategic review under its new leadership and corporate structure, focusing on cost reductions and capital efficiency initiatives. This effort to reduce free cash flow deficits while maintaining its current liquidity position under a weak North American natural gas pricing environment should have a modestly positive impact on the Company’s credit metrics over the medium term. Encana also plans on adopting a more disciplined capital expenditure program, reducing capital spending to only plays with the highest potential return. As such, the Company intends to continue focusing on developing and increasing production on higher-margin liquids-rich gas and oil plays; however, DBRS does not expect significant near-term cash flow contribution from liquids operations, considering the high level of capex to ramp up liquids and oil production.

Despite more prudent financial management from the Company, Encana will continue to face pressure due to its significant exposure to North American natural gas (91% of H1 2013 production), pricing of which remains depressed due to excess supply conditions. However, the Company’s position as a low-cost producer provides somewhat more flexibility to withstand lower pricing environments than its higher-cost peers over the near term. Should the pricing environment remain challenging in the medium term, further negative pressure on the rating could result.

During H1 2013, Encana’s financial profile weakened further as depressed North American natural gas pricing fundamentals continued. Operating cash flow was not sufficient to fund capex and dividends, resulting in a free cash flow deficit of $421 million. Asset sales of approximately $500 million were used toward funding the deficit. DBRS expects free cash flow deficits to continue to be funded by further asset sales going forward, in order for the Company to maintain sufficient liquidity for the rating category.

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

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