DBRS Publishes Report on Encana Corporation and Subsidiary

DBRS has today published a report on Encana Corporation (Encana or the Company) and Encana Holdings Finance Corp. The credit quality of Encana and Encana Holdings Finance Corp. is based on (1) its focus on lower-risk unconventional natural gas, (2) its position as a low-cost producer as compared with its peers and (3) economies of scale in the North American marketplace. Despite these strengths, the credit quality is limited by (1) excess natural gas supply in the North American market, (2) expected weakness in its financial profile as a result of the current challenging market conditions and (3) reliance on, and timing of, asset divestitures in order to fund cash flow deficits to maintain its financial profile.

Results for Q1 2012 remained challenged, as natural gas market fundamentals remained depressed. A cash flow deficit for the quarter was funded largely with proceeds from joint venture agreements.

Given the continued depressed pricing of North American natural gas, the Company continued to focus its growth on higher margin liquids production (up over 20% from 2011). In June 2012, Encana announced plans to increase capital expenditure (capex) by $600 million for the remainder of 2012, to approximately $3.5 billion. Although the full increase in capex is earmarked for liquids growth, meaningful contribution to cash flow from liquids production is expected to take some time. As a result, cash flow deficits are expected for the near to medium term, which could materially weaken key ratios. Encana will likely have to execute a combination of the following to maintain an adequate financial profile in the future: asset sales, joint venture agreements with upfront cash receipts, dividend reduction and capital expenditure curtailment.

If Encana is successful in implementing a sustainable recovery, which would be largely influenced by the timing of the natural gas price recovery and, to a lesser extent, liquids production volume growth, DBRS may consider changing the trend to Stable. However, ongoing natural gas price weakness and resulting implications on Encana’s future financial profile, in the absence of substantial hedging support, would result in further rating pressure

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.