National Post

Pain patch

Ugly Encana results glimpse at oil-sector misery.

- Western Business Columnist Claudia Cat taneo Financial Post ccattaneo@nationalpo­st.com Twitter .comcattane­ooutwest

Encana Corp. kicked off second-quarter earnings season Friday for Canada’s large oil and gas producers with a US$1.6 billion loss, providing a taste of the sector’s misery from continuing low oil prices: layoffs, cost cuts, tight spending, asset sales and uncertain investment plans.

The Calgary-based producer said it cut an additional 200 jobs as the fight over market share instigated by Saudi Arabia last November drags on with no relief in sight.

The new round increases layoffs to 1,400 positions at Encana. That’s about onethird of its workforce since it first announced plans to become a more balanced oil and gas producer at the end of 2013, largely through acquisitio­ns of oil-producing properties.

“Obviously in today’s commodity price (environmen­t) our spending levels are a lot lower than we had anticipate­d when we originally launched our strategy,” Doug Suttles, president and CEO, said to reporters. “The most recent cuts unfortunat­ely meant a little over 200 of our staff have left the company over the past month or so.”

Meanwhile, Suttles said he expects acquisitio­n and divestitur­e activity to pick up in the industry this quarter, while not revealing Encana’s plans. With lower oil prices staying around longer than many initially expected, buyers and sellers are finding agreement over price and companies that were pushing out decisions hoping for a price recovery are more eager to make a deal, he said.

As is the case with Encana, surviving the swelling rough patch will be the big theme for the oil group in the quarter – though some companies are better equipped than others.

“Overall, we expect it to be a relatively uneventful quarter, given the general industry slowdown and cautious outlook following challenges in the first half,” said Brian Milne at National Bank Financial. The analyst is forecastin­g the industry’s combined second quarter production to be down seven per cent quarter on quarter, and cash flows up three per cent during the period.

Producers with refineries and higher oil weighting are expected to see a cash flow improvemen­t compared to the first quarter due to higher oil prices, a lower Canadian dollar, improved refining margins, said Peters & Co. in a report.

“Downstream margins were surprising­ly strong in February/March, and this carried through into Q2 – spot spreads are also very strong which bodes well for Q3 results,” said the Calgary-based energy investment bank. “This should be positive for all of the integrated companies, but particular­ly Cenovus (Energy Inc.), Husky (Energy Inc.) and Suncor (Energy Inc.).”

At Encana, the US$1.6billion loss was primarily due to an impairment charge of US$1.33 billion as low oil and gas prices reduced the value of its properties.

Excluding the charge, Encana’s operating loss was US$167 million, compared to a profit of US$271 million and an operating profit of US$171 million in the same period last year.

Shares fell 8.6 per cent to close at $10.23 in Toronto.

Encana’s efforts to boost its oil business resulted in an 87 per cent increase in liquids production, to 127,300 barrels per day. Natural natural gas production was 1.6 billion cubic feet per day, or 38 per cent lower than in the same period last year.

RBC Dominion Securities Inc. analyst Greg Pardy said the results missed street consensus on earnings, cash flow and production volumes.

On the upside, Encana was able to make its capital 20 per cent more efficient by pushing down costs, enabling it to do more with less spending, and had numerous operating successes. The improvemen­ts are expected to stick even if oil prices recover.

Encana has narrowed its focus to two tight oil deposits in the U.S., the Permian and the Eagle Ford, and two shale gas plays in Western Canada, the Duvernay and Montney, while starving the rest of its portfolio of capital.

With its budget set at US$2 billion to US$2.2 billion this year, Suttles said he doesn’t see more cutbacks even if oil prices fall further.

Over “the long term I don’t think the market balances at US$50” a barrel oil, he said. “It will take a higher price ... But in the short term we are over supplied and for a number of reasons, with the most significan­t being the change in OPEC’s plans and strategies.

“The real question is: does it work itself out over six months, or does it take a couple of years? And I don’t know the answer … you have to manage the company prudently, and we think we are doing that. We think we have got it set at about the right place.”

Meanwhile, Encana will wait as long as it can to finalize investment plans for 2016.

Over 200 of our staff have left the company over the past month or so

 ?? Brenan Linsley / The Associate d Pres Files ?? A worker adjusts hoses at an Encana Corp. gas well, near Mead, Colo. The Calgary-based producer said it cut
an additional 200 jobs as the fight over market share instigated by Saudi Arabia drags on.
Brenan Linsley / The Associate d Pres Files A worker adjusts hoses at an Encana Corp. gas well, near Mead, Colo. The Calgary-based producer said it cut an additional 200 jobs as the fight over market share instigated by Saudi Arabia drags on.
 ?? Jef McIntosh / The Cana dian Pres ?? Doug Suttles
Jef McIntosh / The Cana dian Pres Doug Suttles
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