DBRS Confirms Ratings of Encana Corporation at BBB with Stable Trends

DBRS Limited (DBRS) has today confirmed the Issuer Rating and the Unsecured Senior Notes and Medium-Term Notes & Debentures ratings of Encana Corporation (Encana or the Company) at BBB with a Stable trend. DBRS has also discontinued the Commercial Paper rating of Encana. The rating confirmations reflect Encana’s track record of prudently managing its balance sheet while continuing to transition away from natural gas drilling to higher-margin liquids-rich gas and oil drilling. The rating confirmation also incorporates DBRS’s expectation that key credit metrics will weaken materially in 2015. However, a negative rating action could be triggered if key financial metrics deteriorate beyond the ratings range on a sustained basis. Encana’s ratings could be more vulnerable than those of other higher-rated investment-grade peers because of its weaker internally generated cash flow capabilities and continued capital expenditures (capex) that would be required to ramp up liquids production should the current low commodity price environment persist beyond 2015.

One key challenge for Encana and its peers is adapting to what could be an extended period of low oil and natural gas prices. In the midst of this challenging period and with the un¬certainty about the timing of commodity price recovery, it is im¬perative for an oil and gas company to (1) preserve liquidity, (2) focus on both operating and capital efficiency and (3) maintain capex flexibility to adjust spending accord¬ing to changing commodity prices, which could greatly affect cash flow. Applying the aforementioned three factors, DBRS believes Encana’s ratings could be more susceptible than those of other higher-rated investment-grade peers.

Encana has bolstered liquidity and financial flexibility, as the Company raised $1.1 billion (CAD 1.4 billion) from a common equity issuance through a bought-deal transaction, and divested assets totalled $873 million in Q1 2015. Encana’s available liquidity should be sufficient to fund cash flow deficits over the next several years under a prolonged weak commodity price scenario. In addition, the Company has repositioned and resized the organization by focusing on its top strategic assets with strong liquids production growth potential. As a result of this focused capital allocation, the Company reduced its work force by approximately 25% in 2013, achieving total operating cost savings of approximately $150 million and reducing capex by $400 million in 2014. Encana is targeting additional operating cost savings of over $75 million in 2015.

Encana has been challenged by a limited financial buffer within its current ratings because of its relatively weak cash flow metrics compared with other investment-grade peers, largely driven by Encana’s predominately natural gas weighted production mix, which has below-average margins, and ongoing substantial capex to bolster its production mix further toward higher liquids content. As a result, debt-to-cash flow was weak at 3.7 times in Q1 2015 and is expected to remain depressed at near 4.0 times through 2015.

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 methodologies are Rating Companies in the Oil and Gas Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

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