DBRS Confirms Ratings on Encana Corporation at BBB with Stable Trends

DBRS Limited (DBRS) confirmed Encana Corporation’s (Encana or the Company) Issuer Rating as well as its Unsecured Senior Notes and Medium-Term Notes & Debentures ratings at BBB with Stable trends. The confirmation follows DBRS’s one-notch upgrade on the ratings on March 8, 2019, after closing the strategic combination between Encana and Newfield Exploration Company (Newfield) on February 13, 2019, and the release of both companies’ year-end results.

Based on DBRS’s assessment, the combined entity’s business risk profile has improved considerably. DBRS notes the significant expansion in the Company’s production/reserve base and more balanced production mix. Including Newfield’s production volumes in 2018 compared with Encana as a stand-alone entity, production increased by 54% to 556,000 barrels of oil equivalent per day (boe/d) and higher-margin liquids production accounted for 52% of the combined 2018 production mix versus 47%. In Q2 2019, following one full quarter of Newfield contribution, production was 592,000 boe/d and liquids accounted for 55% of the production mix. The addition of Newfield’s assets also results in better geographic diversification, which further supports the improved business risk profile. Encana plans to focus on developing three core areas (the Permian Basin in Texas, the Montney Formation in northeast British Columbia and northwest Alberta as well as the Anadarko Basin in Oklahoma) supplemented by a base of production primarily from four other areas (Eagle Ford Shale in Texas, Williston Basin in North Dakota, Uinta Basin in Utah and the Duvernay resource play in western Alberta). The broader portfolio of resource plays enhances the Company’s capital flexibility by allowing more optionality in the allocation of capital across plays. In addition, synergies and cost savings are being realized as a result of the combination, notably the deployment of Encana’s cube development model to more efficiently develop Newfield’s Anadarko resource play. Nevertheless, the business risk profile and rating continue to be constrained by Encana’s still-sizable exposure to weak North American natural gas markets. The Company has mitigated this exposure to some degree with successful hedging activities; however, DBRS highlights that the ability to favourably hedge natural gas in the future is diminishing as forward market prices have fallen.

DBRS notes that the Company’s key credit metrics continue to strengthen as a result of the combination, aided by the oil-price recovery, shift to a higher-value production mix and efforts to strengthen the balance sheet by selling non-core assets and managing capex. Assuming a West Texas Intermediate oil price of $55 per barrel and a New York Mercantile
Exchange natural gas price of $2.75 per thousand cubic feet over the second half of 2019, Company guidance on production volumes and capex of $2.5 billion to $2.7 billion in 2019, Encana should be modestly free cash flow positive (i.e., cash flow after capex and dividends) this year. DBRS anticipates that the Company’s key credit metrics will improve further through next year and support its BBB ratings. Encana’s liquidity is also sufficient and, in the first six months of 2019, the Company repurchased common shares of approximately $1.0 billion with plans for additional purchases and modestly increased its common share dividend.

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

The principal methodologies are Rating Companies in the Oil and Gas and Oilfield Services Industries (August 2019) and DBRS Criteria: Guarantees and Other Forms of Support (January 2019), which can be found on dbrs.com under Methodologies & Criteria.

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.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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