DBRS Comments on Encana’s New Corporate Strategy Announcement

DBRS notes that on November 5, 2013, Encana Corporation (Encana or the Company; rated BBB with a Stable trend) announced its new corporate strategy. Based on DBRS’s review of the corporate strategy and its impact on the Company’s overall risk profile, DBRS views the announcement as modestly credit positive for Encana.

From a financial risk perspective, the new initiatives, including a planned decrease in dividends (approximately $380 million pre-dividend reinvestment plan (DRIP)), staffing reductions (estimated at about $80 million), lower capital expenditures (capex) in 2014 (a reduction of $200 million to $400 million compared to 2013 forecasts) and an intent to spin out its Clearwater royalty business through an initial public offering (IPO), are expected to provide Encana with greater financial flexibility and have a modestly positive impact on the Company’s key credit metrics over the medium term. From a business risk perspective, the Company should benefit from an improved cost structure, a higher liquids production mix and the Clearwater IPO’s minimal impact on operating cash flow going forward. Despite these modestly positive initiatives, DBRS does not expect significant near-term cash flow contribution from liquids operations, considering the high level of capex required to ramp-up liquids and oil production. Encana’s ability to achieve a balanced production mix over the medium term remains challenging and the Company is expected to continue to be pressured by its significant exposure to the depressed North American natural gas pricing environment. However, DBRS expects Encana to maintain its key credit metrics in line with its current rating.

Under the new corporate strategy, Encana is continuing to focus on cost reductions and capital efficiency. In its announcement, the Company stated that it will be lowering dividends by 65% (approximately $380 million pre-DRIP), reducing its workforce by about 20% and decreasing its capex to $2.5 billion in 2014 (compared to the forecasted $2.7 billion to $2.9 billion in 2013). The Company is also planning to concentrate its capital investment (75% of planned capex) in five specific plays – Montney, Duvernay, DJ Basin, San Juan Basin and Tuscaloosa Marine Shale. In addition, Encana announced its intention to spin out Clearwater through an IPO by mid-2014. However, it is expected to maintain a significant holding in the spinoff company.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Oil and Gas Industry (July 2013), which can be found on our website under Methodologies.