DBRS Places Encana Corporation Under Review–Developing Following Agreement to Acquire Newfield Exploration Company

DBRS Limited (DBRS) placed the BBB (low) Issuer Rating and the BBB (low) Medium-Term Notes & Debentures and Unsecured Senior Notes ratings of Encana Corporation (Encana or the Company) Under Review with Developing Implications. This rating action follows the announcement that the Company has entered into a definitive agreement whereby it will acquire all of the outstanding shares of Newfield Exploration Company (Newfield) in an all-stock transaction valued at approximately $5.5 billion. Encana will also assume Newfield’s gross debt of $2.45 billion ($2.2 billion net debt). The transaction has been unanimously approved by the Board of Directors of both companies. Subject to regulatory and shareholder approvals, the transaction is expected to close in the first quarter of 2019.

DBRS notes that Newfield is a U.S.-based exploration and production company focused on developing liquids-rich resource plays primarily in the Anadarko and Arkoma Basins of Oklahoma, the Williston Basin of North Dakota and the Uinta Basin of Utah. Of particular note is Newfield’s holdings of approximate 360,000 acres in the core of the world-class STACK/SCOOP resource play in the Anadarko Basin. This oil-weighted, stacked-pay asset contains multiple commercial and prospective zones that are well suited to Encana’s cube development model. The asset contains over 6,000 net risked well locations and approximately 3 billion barrels of net un-risked resource potential. In the third quarter of 2018, Newfield’s production (excluding China) was 199,000 barrels of oil equivalent per day (boe/d), of which 61% was liquids (oil, condensate and natural gas liquids). At year-end 2017, Newfield had net proven reserves (excluding China) of 678 million boe with a reserve life of 12.2 years. On a pro forma basis (based on reported Q3 production), Encana’s production increases 53% to 577,000 boe/d and the component of higher-margin liquids in the production mix increases to 52% from 47%. Pro forma proven reserves increase by 85% to 1,473 million boe, and the pro forma reserve life increases by 26% to 8.6 years.

If the agreement is successfully completed, DBRS notes that the addition of Newfield’s assets is positive for Encana’s business risk profile. The transaction (1) adds scale, creating North America’s second-largest producer of unconventional resources; (2) enhances geographic diversification by supplementing Encana’s four current core areas with four additional resource plays in different geologic basins; and (3) improves capital flexibility, since it enables the Company to allocate capital among assets that provide the highest-margin opportunities and to efficiently scale back capital spending in the event commodity prices decline. Moreover, Encana anticipates that synergies can be realized from the transaction because of additional scale, employment of the cube development model and overhead savings.

DBRS also notes that the completion of the transaction should have a mildly positive impact on Encana’s credit profile. Based on the last 12 months ended September 30, 2018, the pro forma lease-adjusted debt-to-cash flow ratio improves to 2.0 times (x) from 2.2x and within the BBB range. The pro forma lease-adjusted EBIT-to-interest ratio improves to 4.3x from 2.8x (outside the BBB range), and the lease-adjusted debt-to-capital ratio improves to 36.9% from 39.9% (within the BBB range). Furthermore, DBRS anticipates that the combined entity’s credit metrics should strengthen in the future based on (1) the assumption of a West Texas Intermediate (WTI) oil price of $60 per barrel and New York Mercantile Exchange (NYMEX) natural gas price of $3.00 per thousand cubic feet, (2) additional growth from the contribution of higher-margin liquids production and (3) capital spending in line or below cash flow. Furthermore, DBRS expects the combined entity to have sufficient liquidity. At September 30, 2018, pro forma the Company had close to $0.9 billion of cash and a well-spread-out debt maturity schedule. Encana (as a stand-alone entity) had undrawn credit facilities of $4.0 billion as at September 30, 2018. Encana plans to continue its share buyback program and has announced an expanded program to purchase up to $1.5 billion of shares by the end of 2019.

Assuming a successful close in the new year, DBRS views the transaction overall as being modestly credit positive. Upon closing, DBRS anticipates resolving its Under Review with Developing Implications status. DBRS may confirm the current ratings or possibly take a positive rating action.

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

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2018), which can be found on dbrs.com.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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