Encana ‘resets’ dividend with cuts
Encana Corp. is planning to “reset” its dividend next year as it adjusts to a protracted downturn that has seen oil prices decline to a six year-low.
The Calgary- based company said it is cutting its dividend by 79 per cent to six cents from 28 cents. The company’s stock tumbled fell 68 cents or 8.2 per cent to $ 7.63 on the Toronto Stock Exchange on Monday.
“This reset better aligns our dividend with our cash flow or balance sheet and recognizes the very high quality investment options in our portfolio,” CEO Doug Suttles told analysts during a conference call outlining the company’s 2016 capital program.
Canada’s oil and gas sector is in the middle of an austerity drive, as one of the world’s highest- cost j urisdictions comes to terms with prices that have dipped below US$35 per barrel and have lost more than 50 per cent of their value in the space of a year.
The i ndustr y has l ost 35,000 jobs since OPEC members started driving down prices by raising output in a bid to squeeze out high costproducers in November 2014.
Canadian companies have responded by reducing headcounts, shelving projects, reining in capital expenditure and cutting dividends to protect their balance sheets — and there may be little respite in the new year.
Encana plans to cut its capital spending by 27 per cent next year to between US$ 1.5 billion to US$ 1.7 billion, with half the budget allocated to its Permian basin straddling Texas and New Mexico.
Indeed, the company plans to raise investment in its Permian operations to around $ 800 million from $ 700 million a year earlier, but will throttle back in Eagle Ford, and in the Canadian shale plays of the Duvernay and Montney, as it focuses on the most costeffective play in its portfolio.
Total production is estimated to rise 12 per cent to 340,000 to 370,000 barrels of oil equivalent per day next year — but it was not enough to please analysts.
“While the capital budget was in line with expectations, both total production and liquids production fell short of expectations, which will likely see our cash flow estimates come down with leverage increasing further,” wrote Kyle Preston, an analyst with National Bank Financial Inc. The analyst sees the company’s announcement as “negative”, and cut its price target to US$ 8 from US$10.
The company will outspend cash flow next year, with its cash flow of $ 1 billion to $ 1.2 billion reflecting a cash shortfall of $ 550 million, based on U.S. crude prices of US$50 per barrel and US$2.75 natural gas prices.
“While we do not see any near- term risk of breaching any debt covenants, we believe the budget may have to be revised down again if commodity prices remain at or near current levels for an extended period,” Preston said.
In a bid to live within its means, the company cut its debt this year through a $1.44 billion bought deal equity offering and US$ 2.8 billion in divestiture proceeds, and has no long- term debt maturities until 2019.
The company also has financial flexibility as 90 per cent of its capital spending is discretionary and 75 per cent of its crude and condensate production was hedged.
“I think that gives us some protection for these programs, and it allows us to look beyond just the next quarter or even the next year and look at 2017 and beyond,” Suttles said.
In addition, the dividend cut will save the company around US$ 187 million and rein in its high debt leverage.
“Among the largest motivations to cut the dividend, we believe, is the defence of ECA’s investment grade credit rating,” Nicholas Lupick, analyst at AltaCorp Capital said in a note.