DBRS Confirms Ratings of Encana Corporation at BBB (low) with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating, Unsecured Senior Notes rating and Medium-Term Notes & Debentures rating of Encana Corporation (Encana or the Company) at BBB (low) with Stable trends. Encana continues to focus on adding higher-margin liquids-rich gas and light oil production sourced from four core resource plays: the Permian Basin and Eagle Ford Shale in the United States plus the Duvernay Shale and Montney Shale in Western Canada. The Company operates all its assets within these core areas, which accounted for 83% of its total production in 2017. Consequently, the Company’s production mix has become more balanced with oil and liquids accounting for 41% of the production mix in 2017 versus 18% in 2014. Encana has also reduced its overall cost structure, improved capital and operating efficiencies and fortified its resiliency to better manage commodity price volatility. These enhancements, in addition to the Company’s size, support DBRS’s assessment of a business risk profile rating within the BBB range. However, DBRS notes a key constraining factor is the Company’s shorter reserve life index (7.6 years on a proved basis and 4.3 years proved developed) relative to a number of its peers. Because of the shorter reserve life index, the Company’s base production decline rate is higher and more capital spending (capex) is needed to sustain production levels.

DBRS notes that the Company’s key credit metrics have improved with the recovery in the price of West Texas Intermediate (WTI) oil combined with the Company’s efforts to strengthen its balance sheet, add higher margin production and reduce costs. For the last 12 months ended March 31, 2018, the Company’s lease-adjusted debt-to-cash flow ratio improved to 2.99 times (x), lease-adjusted EBIT interest coverage increased to 2.17x (both outside the BBB range) and the lease-adjusted debt-to-capital ratio nominally improved to 38.9% (within the BBB range). Assuming a WTI oil price in excess of $55/barrel (bbl) and New York Mercantile Exchange natural gas price of $3/mcf combined with Company guidance on production volumes and capex ($1.8 billion to $1.9 billion) for 2018, Encana’s cash flow from operations is expected to rise further from 2017. Under this scenario, DBRS anticipates Encana should reach free cash flow (cash flow after capex and dividends) neutrality or better this year. Therefore, DBRS anticipates the key credit metrics strengthening further this year and into 2019, adding support to the Company’s ratings.

The Company’s liquidity is sufficient with $433 million of cash as at March 31, 2018, $4.0 billion of undrawn credit facilities and the next series of Notes ($500 million) maturing in May 2019. However, in the event the price of WTI declines to the low forties or lower and remains low for an extended period, the Company’s key credit metrics could come under significant pressure and DBRS may be compelled to take a negative rating action. DBRS considers the probability of such an occurrence as low.

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, which can be found on dbrs.com under Methodologies.

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 additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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