DBRS Confirms Ratings of Encana Corporation at BBB (low)

DBRS Limited (DBRS) has today confirmed the ratings of Encana Corporation (Encana or the Company) at BBB (low), as noted below. All trends are Stable. As a result of asset sales and targeted capital spending, Encana has further transitioned from natural gas to higher-margin liquids-rich gas and light oil production sourced from four core resource developments: the Permian and Eagle Ford in the United States and the Duvernay and Montney in Western Canada. The Company has scale and operates all of its assets in each of these four core developments. With the transition, Encana has reduced its overall cost structure, improved capital and operating efficiencies and increased its resiliency to lower commodity prices. With a West Texas Intermediate (WTI) oil price in the mid-forties, the Company indicates that it can economically grow production from internally generated cash flow. However, Encana has a shorter proved reserve life index (7.3 years) and still has a relatively high proportion of lower margin natural gas in its production mix. Overall DBRS considers the Company’s business risk profile to be within the BBB range.

DBRS notes that over 2016 the Company took additional steps to reduce financial leverage with asset sales of approximately $1.1 billion after adjustments and the completion of an equity offering for gross proceeds of $1.15 billion. Gross proceeds of $735 million from asset sales to close in the third quarter of 2017 are expected to be employed to further strengthen the balance sheet. For the last 12 months ended March 31, 2017, the Company’s lease-adjusted debt-to-cash flow ratio was 4.36 times (x) and below the BBB threshold, the lease-adjusted debt-to-capital ratio was 40.0% (within the BBB range) and lease-adjusted EBIT interest coverage was 1.02x (below the BBB range). Based on DBRS’s base case WTI oil pricing scenario of $50/barrel (bbl) in 2017 and $55/bbl in 2018 and a New York Mercantile Exchange (NYMEX) natural gas price of $3/million cubic feet (mcf) in both years, the Company’s key credit metrics should improve further through 2018 and support the BBB (low) rating.

Encana has planned a 2017 capital budget of $1.6 billion to $1.8 billion and DBRS anticipates a free cash flow deficit (cash flow after capex and dividends) in excess of $500 million that can be funded by available cash. About 78% of the Company’s oil and condensate production (excluding natural gas liquids) is hedged over the May to December period at approximately $51.33/bbl and approximately 78% of the Company’s natural gas production is hedged at an average of approximately $3.15/mcf, mitigating exposure to commodity price volatility in 2017. The liquidity profile is sufficient with $523 million of cash as at March 31, 2017 (to be supplemented with additional asset disposition proceeds), $4.5 billion of undrawn credit facilities and no long-term debt maturities until 2019. However, if oil prices and natural gas are significantly below DBRS’s outlook through 2018, resulting in material pressure on the Company’s key credit metrics, DBRS may be compelled to take a negative rating action.

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 principal methodology is Rating Companies in the Oil and Gas Industry (September 2016), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.