Encana Slides as Earnings Miss Overshadows Cost Cuts

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  • Producer lowers general and administrative costs by 20 percent
  • Results are below analysts' estimates amid lower gas prices

Encana Corp.’s first-quarter earnings miss drove the company’s shares down the most in two months, even as it reported double-digit cost savings.

Encana, the Canadian producer switching its focus to oil from natural gas, dropped 9.5 percent to C$8.42 at 10:01 a.m. in Toronto, its biggest intraday drop since March 8.

Per-share cash flow of 12 cents fell short of the 17-cent average of 17 analysts’ estimates compiled by Bloomberg, as Encana took a $31 million charge tied to headcount reduction. The net loss of $379 million, which compares with a $1.7 billion loss in the same period last year, included a $607 million charge tied to accounting for lower gas prices.

Cost Cutting

The earnings miss may overshadow the “impressive” cost improvements, Greg Pardy, an analyst at RBC Dominion Securities in Toronto, wrote in a note. Realized gas prices minus the impact of hedging were $1.73 per thousand cubic feet in the quarter, five percent below RBC’s $1.82 estimate, Pardy said.

Encana has lowered its average drilling and completion costs by 35 percent in Canada’s Duvernay liquids-rich region and 22 percent in its Montney area, compared to 2015 averages, the Calgary-based company said Tuesday in a statement on the earnings. The company also brought down general administrative costs by more than 20 percent compared with the fourth quarter of last year.

Encana is among producers continuing to rein in costs with U.S. crude still down almost 60 percent from its mid-2014 high. The company was in the midst of reorienting toward production of oil and liquids through a host of asset sales and purchases when the market collapsed, and it has continued to struggle with some pricier gas output than its peers.

Execution Improvements

While service providers keep lowering their rates, that’s not what’s driving the bulk of the savings for Encana, Chief Executive Officer Doug Suttles said on a conference call Tuesday. Two-thirds of Encana’s cost cuts are related to improvements in execution, he said, and are expected to be maintained even in a market turnaround. The company is implementing novel techniques such as completing 14 wells on the same pad at one time, he said.

“This is what leading-edge operators are going to be doing,” Suttles said.