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Another North American energy company has taken a significant financial hit from the 8-month-old plunge in oil prices. This time it’s Encana Corp., the largest gas producer in Canada, which suffered an 84.5 percent drop in fourth-quarter operating profits in 2014.
For at least the past year, Encana, based in Calgary, had shifted much of its spending to extracting oil and away from gas production because of the unpredictability of the price of gas. But while the company’s oil production increased, its profits shrank as crude prices dropped.
Encana had even acquired Athlon Energy of Fort Worth, Texas, for $5.93 billion in November at a time when the industry was cutting spending on such companies. The problem was that Athlon specialized in extracting oil from shale, which requires expensive hydraulic fracturing, or fracking, and becomes unprofitable as oil prices continue to fall. Overall Encana spent about $9 billion buying assets in 2014.
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As a result, the company said Feb. 25 that it would reduce spending by $700 million to between $2 and $2.2 billion in 2015, despite more ambitious claims made in December in the range of $2.7 to $2.9 billion for this year. And cash flow projections are also down, expected to be between $1.4 billion and $1.6 billion this year, down from previous forecasts of $2.5 to $2.7 billion.
During the fourth quarter of 2014, Encana reported, operating earnings declined from $226 million a year earlier, or 31 cents per share, to $35 million, or 5 cents per share. Analysts had expected share values of 21 cents each, according to a survey conducted by the Thomson Reuters Foundation.
Encana’s cash flow fell by 44 percent to $377 million, or 51 cents per share, in large part because of higher taxes in general and, more specifically, the cost of acquiring Athlon Energy.
Nevertheless, Encana CEO Doug Suttles said no further spending cuts are planned, even if the company faced more bad financial news. He said the company’s strategy is to develop four sources of unspecified resources in North America, and that cutting spending further might threaten them and, by extension, Encana’s future financial growth.
“Would we move [the budget] lower? Possibly. Probably prefer not to do that,” Suttles told The Globe and Mail. “Unless you really believed this environment was forever, you actually say: ‘Don’t you want to continue to develop those assets?’ ”
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Suttles said he preferred relying on “financial options” rather than budget cuts, even if things get worse. One such option would be offering shareholders the opportunity to reinvest dividends in Encana at a discount. He conceded that this wouldn’t raise a significant amount of money, but it would give the company a certain financial resilience.
“Maintaining financial flexibility seems to make a lot of sense in this low-commodity-price [environment],” Suttles told The Globe and Mail, “and this is just one relatively small but not unimportant thing we can do.”
Encana’s downgrades in capital expenditures and cash flow came as no surprise to analysts. After all, the company’s original draft for its 2015 capital budget was predicated on the price of West Texas Intermediate crude at around $70 per barrel. The revised budget is based on WTI at $50 per barrel.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com