DBRS Confirms Encana Corporation at BBB, R-2 (middle), with Stable Trends

DBRS has today confirmed the Issuer Rating, Unsecured Senior Notes and Medium-Term Notes & Debentures ratings of Encana Corporation (Encana or the Company) at BBB and the Commercial Paper rating at R-2 (middle). All trends are Stable. The rating confirmations reflect Encana’s strong liquidity profile, prudent financial discipline, and its ability to expedite rebalancing of its production mix while improving its key credit metrics. DBRS has also today discontinued the Unsecured Long-Term Notes rating of Encana Holdings Finance Corp. since the notes were repaid in full in April 2014.

On May 7, 2014, Encana announced the $3.1 billion cash-funded acquisition of Eagle Ford assets to almost double the liquids mix in its production from 10% in 2013 to approximately 19%. DBRS considers the acquisition to be positive for Encana’s business risk profile as it helps the Company expedite rebalancing of its portfolio away from natural gas and toward higher netback crude oil.With $2.3 billion of recently announced divestitures and $0.8 billion expected from the initial public offering of its royalty interests in its Clearwater area, Encana is expected to have ample cash on hand to fund the transaction. DBRS notes that the all-cash nature of the acquisition makes it largely credit neutral for Encana’s financial risk profile.

Given the predominantly natural gas weighted production mix (although the liquids mix improved to approximately 80% after the recent rebalancing transactions), Encana remains exposed to North American natural gas pricing, which, despite recent improvements, remains depressed due to excess supply conditions. However, the Company’s position as a low-cost producer, commitment to further cost reductions, lowered dividends and curtailed natural gas centric capital expenditures (capex) provides somewhat more flexibility to withstand lower pricing environments than its higher-cost peers over the near term. Under the current commodity price scenario, Encana’s ability to opportunistically bolster its production mix further towards higher liquids content while maintaining its financial risk profile remains key for its current rating category.

With a disciplined financial strategy and increased higher netback liquids production, key financial metrics improved materially in Q1 2014. DBRS expects the key ratios to improve further in 2014 and be consistent with the BBB range in the near term.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.