Encana Corporation (TSX:ECA)(NYSE:ECA) recently reported its fourth-quarter results, updating investors on a mind-numbing array of numbers. That said, while each number is important in its own right, three in particular really stood out as being the most important for investors to focus on this quarter.
1. Core production growth of 35%
Each quarter Encana reports a vast array of numbers regarding its oil and gas production. The most important, however, is production from its four core assets because that’s the foundation the company is building for the future. For the fourth quarter, production out of those assets increased to 274,000 barrels of oil equivalent per day (BOE/d), which is up 35% year over year and exceeded its guidance target of 270,000 BOE/d.
This number is important for two reasons.
First, because this is the new foundation of the company, it’s important to see that it’s showing strength. That was clear last quarter when production from its core was even stronger than expected, given that production exceeded guidance.
Second, this production is much higher margin than its legacy production because it’s coming from liquids like oil and NGLs. While the value of both is down, they are still much more profitable than natural gas.
2. Cash flow growth of 3%
Those wider margins were clear when taking a closer look at Encana’s cash flow, which increased by 3% over last quarter to $383 million. That’s pretty remarkable considering that oil and gas prices weakened over the prior quarter. Encana was able to overcome that weakness via the aforementioned production boost and cost reductions.
Generating a solid cash flow in the current environment is very important because it gives the company the cash it needs to fund oil and gas drilling as well as to keep its balance sheet from deteriorating.
3. Debt reduction of 30%
Speaking of the balance sheet, Encana did a great job improving it during the year. Thanks to non-core asset sales and an equity issuance, the company was able to reduce its debt by $2 billion, or roughly 30%. Further, since starting its debt-reduction focus in 2013, the company has reduced its annual interest expense by $150 million.
More debt reduction is on the way, and the company is expected to close the sale of its DJ Basin assets in the second quarter. That transaction is expected to bring in $900 million, which will further strengthen its balance sheet.
Having said all that, while Encana has made strong progress to improve its balance sheet, it does have a lot more work to do. That was evident after its credit rating agency recently downgraded its credit rating to junk because Encana still has a lot of debt, which is a problem because its cash flow could decline materially should oil and gas prices remain weak, tightening its leverage metrics.
It’s a situation the company continues to address by cutting costs, which is why it recently reduced its workforce, its dividend, and its capex budget in order to free up more cash flow to prevent its leverage metrics from further deterioration.
Investor takeaway
Last quarter Encana improved the three numbers that mattered most: core production, cash flow, and debt. That’s very important, given how weak industry conditions are right now, which is why investors will want to continue monitoring these numbers to see if Encana can continue to improve in each area.
Its ability to do so will not only ensure it survives the downturn, but put it in the position to really thrive when conditions finally improve.
