Encana, Cenovus send different messages to their shareholders
Natural gas firm looking forward, while oil producer focuses on paying down debt
The “old Encana” reported 2017 results on Thursday, as both Encana and Cenovus were out with their full-year numbers.
And the stories were very different.
In a nutshell, Cenovus is where Encana was a few years back — having to regain credibility with investors, pay down debt and refocus its asset base.
Encana delivered a message that was forward-looking and growth-oriented, after the company re-calibrated to the new environment, restructured and de-leveraged its balance sheet. Cenovus still has work to do to pay down debt, streamline the asset base and regain investor confidence.
Encana announced results for the year showing revenue of US$4.44 billion and net income of $827 million, compared with revenues in 2016 of $2.92 billion a loss of $944 million. The higher numbers were recorded despite a year-over-year drop in production, to 313,200 barrels of oil equivalent per day from 352,700 boe/d in 2016.
But those numbers have put Encana in a position that Cenovus likely envies — having cash to allocate to something other than paying down debt.
Encana’s suite of choices included instituting a share buyback, increasing the dividend or making an acquisition; On Thursday, the company announced it’s going to institute share buyback of up to $400 million shares.
While some might view share buybacks as financial engineering — fewer shares means a higher earnings and cash flow per share — and that it doesn’t actually create value, others will make the point it is less restrictive than increasing a dividend; once the buyback is done, it’s done. But if a company boosts its dividend and has to scale it back at a later date, it will do more damage to the shareholder base and how it views management.
And while there were a number of interesting developments throughout the year that president and chief executive Doug Suttles highlighted during the conference call, one key takeaway was the competitiveness of the Montney play relative to Permian basin in the United States.
The combination of lower capital costs and a condensate price that is equal to West Texas Intermediate translates into better margins from Montney production compared with the Permian.
It also helps that Encana has established itself as a very efficient operator in the Midland basin, where the Permian is located.
“They know how to execute big resource play development ... and are showing themselves to be one of the best, if not the best, in the Midland basin,” said Mike Dunn, who follows the company for GMP FirstEnergy.
Competitive or not, there is still too much natural gas being produced in Western Canada, and what’s interesting is that this situation highlights the contrast between natural gas and oil producers when it comes to pipelines and transportation access.
Whereas the issue in the natural gas world is that the pipe exists, but producers are unwilling to commit to long-term contracts, the challenge for oil producers remains a regulatory one in that the pipes are facing obstacles in terms of being built.
This issue of pipeline capacity was a subject addressed by Cenovus CEO Alex Pourbaix during the company’s conference call — his first since taking over from Brian Ferguson — and later during an interview.
Cenovus has a rail terminal at Bruderheim that is currently running at 16 per cent of its 75,000 barrels a day capacity.
“Since I got here, it’s been apparent to me that we have to get more oil moving by rail in this province ... in the short term, the real relief will come from re-rating Keystone in the U.S. and getting a material volume of oil moving by rail,” said Pourbaix. “It’s a real priority for us ... we are presently negotiating with both of the rail companies. I am confident that ... by mid-year we should see material volumes moving ... there is an extraordinarily compelling argument to get that oil moving and starting to deal with this acute problem we have with the differentials.”
What was clear in Pourbaix’s comments is that the company is still in the penalty box. Though with the changes he has made in reducing the workforce and the closing of asset sales that have netted $3.7 billion and enabled the company to pay off the bridge loan associated with the ConocoPhillips acquisition almost a year ago, the company is in a better position than it was.
But the way to get out of the penalty box means continuing to focus on paying down debt.
His goal is to get Cenovus’s net debt to earnings before interest, depreciation, taxes and amortization (EBITDA) multiple to a level of less than two times, down from the current 2.8 times.
“My view is that the best defence to the commodity cycle is a very strong balance sheet,” he said.
The levers at his disposal to get there are continued assets sales — there is a package on the market right now — and a continued focus on decreasing general and administrative expenses. The other factors that will help achieve that goal are a higher oil price and a narrower pricing differential between light and heavy oil, neither of which he has any control over.
The company’s results showed a 216 per cent increase in free cash flow to $1.3 billion over 2016 and continuing reductions in sustaining capital required in its oilsands operations as well as operating costs. For the year ended, net earnings were $3.4 billion, or $3.05 per share while total production grew to 470,490 barrels of oil equivalent from 271,525 boe/d.
Cenovus clearly benefited from the results of the downstream joint venture with Phillips 66, in which it has a 50 per cent ownership in two refineries.
Pourbaix said he sees increasing the company’s downstream exposure through future investments is a direction he would like to take in the long term.
“As a heavy oil producer, I think a downstream integration strategy makes a lot of sense. We have significant integration ... but over the longer term ... I do think the integration strategy makes sense as a long-term goal,” said Pourbaix, emphasizing it was not on the radar screen in the short term.
For anyone who has followed the Encana story — from the merger of Alberta Energy and PanCanadian in 2002, to the 2009 split of the company into the two entities that reported Thursday — it’s hard not to wonder what might have been had they stayed as one entity; investors would be looking at an illustration of the adage that the whole is greater than the sum of the two parts.
Since I got here, it’s been apparent to me that we have to get more oil moving by rail in this province.