Analyzing Encana’s 1Q16 Earnings Call and Management Strategies

All You Need to Know about Energy Producer Encana

(Continued from Prior Part)

Encana’s 1Q16 earnings call

For 1Q16, Encana’s (ECA) adjusted revenue and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of ~$753 million and ~$216 million, respectively, resulted in an adjusted EBITDA margin of ~26%.

Encana’s 1Q16 adjusted EBITDA margin was much lower than its ~40% margin in 1Q15 despite strong cost reductions. This fall was mainly due to much lower realized natural gas prices. We’ll study Encana’s realized prices for 1Q16 later in this series. Now, let’s look at Encana’s cost reduction strategy.

Encana’s cost reduction strategy

In order to deal with lower natural gas and crude oil prices in 2016, Encana’s management has been strongly focusing on cost reductions. It has set a target of $500 million in cost reductions for the year.

While commenting on this during Encana’s 1Q16 earnings call, its president and CEO Douglas Suttles said, “We are on track to meet or beat our 2016 cost savings target of $550 million. Operational innovation is the key driver of our 2016 program.”

Suttles continued, “Just one quarter into this year, our teams are already meeting or beating their 2016 drilling and completion cost targets.”

In 1Q16, Encana has successfully reduced its drilling and completions costs by ~22% and ~44%, respectively, year-over-year, which has resulted in ~25% more production efficiency.

Encana’s DJ Basin divestiture

In October 2015, Encana reached an agreement to sell its DJ Basin assets to Crestone Peak Resources for ~$900 million. However, the sale was delayed, and it’s now expected to close in 2Q16.

While commenting on the delay, Suttles said, “The story on the DJ hasn’t changed since December. We’re – I think we mentioned briefly there that we’re still on track, we believe, to close by the end of this quarter. And the proceeds haven’t changed; the deal terms haven’t shifted. And we keep working forward with Crestone, who is the purchaser, to get that closed by the end of the quarter, and I still think we’re on track to achieve that.”

The DJ Basin divestiture is part of Encana’s transformation strategy. For more details on this strategy, you can read Why Montney Is Encana’s Core Resource Play.

Other upstream players

To deal with lower energy prices and raise cash, other upstream players from the S&P 500 (SPY) and the S&P Midcap 400 (MDY), including Murphy Oil (MUR), Chesapeake Energy (CHK), Anadarko Petroleum (APC), and CONSOL Energy (CNX), have also recently completed divestitures.

To preserve cash, Southwestern Energy (SWN) has elected to pay its dividend on preferred stocks in shares of its common stock.

Continue to the next part for a rundown of Wall Street’s most recent reactions regarding Encana’s stock.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - How the Fall in Natural Gas Prices Affected Encana’s Earnings

• Part 3 - What Are Wall Street Analysts’ Ratings for Encana?

• Part 4 - Understanding Encana’s 1Q16 Production Volumes