Encana Corporation (TSX:ECA)(NYSE:ECA) was unprepared for the collapse in energy prices and has lost 50% in the past 12 months, far more than many other major producers. As with most troubled oil companies, debt has been a major issue. Midway through 2015, the company had roughly $5.5 billion in debt, with more needed to fund expansion plans.
After taking some major write-downs earlier in the year, there wasn’t much room for adding more leverage without unloading some assets. Otherwise, Encana’s credit rating, which is vital for securing affordable loans, would be in danger. What have they done to remedy the situation?
Recent asset sales provided breathing room
On August 25, Encana announced the sale of its Haynesville natural gas asset for $850 million. These assets comprised about 112,000 acres in Louisiana with 300 active wells and proven reserves of about 720 bcfe of natural gas.
On October 8, Encana announced another transaction for the sale of its assets in the Denver-Julesburg basin in Colorado. This was for an even bigger price tag of $900 million. These properties comprised 51,000 acres with proven reserves of about 96.8 million boed.
Along with some other deals, total cash proceeds from divestitures in 2015 amount to $2.7 billion. Management expects to reduce net debt in 2015 by $3 billion by the year’s end. Investors are clearly happy with this. Shares are up nearly 20% since August, while the price of oil remains near $45.
What are you buying today?
With a massive amount of business transactions of the previous 12 months, investors are getting a very different company today. In 2014 over 80% of production was natural gas, not oil. With its repositioned portfolio, over 50% of production is expected to be from oil by 2018. Eighty percent of its capital expenditures are now focused on only four main regions, whereas in 2013, less than 30% of spending was directed at these newly targeted properties.
In all, the business transformation should allow Encana to consolidate its spending plans and produce more oil, which means higher margins. By the end of this year oil-operating margins are expected to be $26 a barrel, while gas-operating margins are only $1.15 per thousand cubic feet. Investors are now buying a delevered company with higher margins and a more focused profile.
The balance sheet looks to be in order
As of now, investors can sleep better knowing that a risk of bankruptcy or forced sale is very low. Encana’s capital funding program for the rest of the year is fully funded, and there are no long-term debt maturities until 2019.
From its debt repayments so far this year, Encana should lower interest expenses by about $200 million a year moving forward. Additionally, the company still has $3.1 billion in undrawn credit facilities. These lines of credit were recently extended to 2020, ensuring that Encana has an emergency source of capital should oil fall further or capital spending need to be raised.
Kudos to company management for turning a troubled company around in such short order. With future profitability expected, even with $50 oil, investors should revisit Encana’s once-volatile shares.