CALGARY Jul 24, 2015 (Thomson StreetEvents) -- Edited Transcript of Encana Corporation earnings conference call or presentation Friday, July 24, 2015 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Brendan McCracken Encana Corporation - VP of IR * Doug Suttles Encana Corporation - President and CEO * Mike McAllister Encana Corporation - COO * Sherri Brillon Encana Corporation - CFO * Rene Zimlock Encana Corporation - Manager, Midstream Marketing and Fundamentals ================================================================================ Conference Call Participants ================================================================================ * Greg Pardy RBC Capital Markets - Analyst * Mike Dunn FirstEnergy Capital Corporation - Analyst * Mike Rommel UBS - Analyst * Benny Wong Morgan Stanley - Analyst * Stephen Richardson Deutsche Bank - Analyst * Jeffrey Campbell Tuohy Brothers - Analyst * Nick Luppick Ultracore Capital - Analyst * Brian Singer Goldman Sachs - Analyst * Jeffrey Lambujon Tudor, Pickering, Holt - Analyst * Bob Brackett Sanford C. Bernstein & Co. - Analyst * David Metes Morningstar - Analyst * John Hennerlin Generale - Analyst * Barbara Bentaski Indenda Capital - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and thank you for standing by. Welcome to Encana Corporation's second quarter 2015 conference call. As a reminder, today's call is being recorded. (Operator Instructions) For the members of the media attending in a listen-only mode today, you may quote statements made by any of the Encana representatives. However, members of the media who wish to quote others who are speaking on this call today, we advise you to contact those individuals directly to obtain their consent. Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Encana Corporation. I would now like to turn the conference call over to Brendan McCracken, Vice President of Investor Relations. Please go ahead, Mr. McCracken. -------------------------------------------------------------------------------- Brendan McCracken, Encana Corporation - VP of IR [2] -------------------------------------------------------------------------------- Thank you, operator, and welcome, everyone, to our second quarter 2015 results conference call. This call is being webcast and the slides are available on our website at encana.com. Before we get started, please take note of the advisory regarding forward-looking statements in the news release and at the end of our webcast slides. Further advisory information is contained in our most recent annual information form and other disclosure documents filed on SEDAR and EDGAR. I also wish to highlight that Encana prepares its financial statements in accordance with US GAAP and reports its financial results in US dollars. References to dollars means US dollars and the reserves, resources and production information are after royalties unless otherwise noted. This morning, Doug Suttles, Encana's President and CEO will provide the highlights of our second-quarter results. Mike McAllister, our COO, will then provide an update on our recent operating activities and Sherri Brillon, our CFO, will discuss Encana's financial results before we open the call up for Q&As. I will now turn the call over to Doug Suttles. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [3] -------------------------------------------------------------------------------- Thanks, Brendan, and thanks, everyone, for joining us this morning. Our second quarter results reflect important progress in the execution of our strategy. After significant portfolio high-grading last year, we are now driving organic growth. Following seven consecutive quarters of liquids growth since launching our strategy, we continue to improve well performance, lower costs and increased well inventory in our four strategic assets: the Permian, Eagle Ford, Duvernay and Montney. We exited the second quarter with significant operational momentum and we expect to accelerate liquids growth through the second half of this year. We are on track to achieve $375 million of operating and capital cost efficiencies by year-end and we believe that about two-thirds of these savings will be sustainable in a higher price environment. During the quarter, we used the net proceeds from our March equity issuance, along with cash on hand, to retire approximately $1.3 billion of long-term debt. This brings our total debt redemption since the launch of our strategy in November of 2013 to about $2.3 billion. We are proactively managing the business through the current environment and we continue to drive efficiency through innovation and capture opportunities to further reduce costs, improve cash flow and strengthen the balance sheet. Like others, we did see some impact in the quarter from adverse weather and flooding in Texas and third-party facility constraints in pipeline outages impacted our Montney operations. These issues are largely behind us as we are well on our way to ramping up production in the Permian and Eagle Ford where we expect to bring on approximately 40 wells in July and an additional 36 wells over the balance of the third quarter. We remain on track to meet our fourth quarter production target of 270,000 barrels of oil equivalent per day from our four strategic assets. We expect that liquids production from these assets will be up more than 50% when compared to the fourth quarter of 2014. Consistent with our strategy to transition the portfolio towards higher margin production, we expect our four strategic assets will contribute about 65% of total production in the fourth quarter. These four assets are located in the core of four of the highest margin and return basins in North America and they continue to deliver competitive returns through the current commodity price environment. For the year we expect the Permian, Eagle Ford and Duvernay to deliver a weighted average operating margin of about $26 per barrel oil equivalent, with the Montney delivering an operating margin of around $1.15 per Mcfe. These assets are also generating strong returns at current prices. Across the four assets we expect to deliver rates of return greater than 30%, using a $50 WTI oil price and a $3 per MMBtu NYMEX gas price. Through our relentless focus on innovation, we continue to seize opportunities to enhance our performance. We plan to continue to focus our remaining 2015 capital to these four assets. I will now turn the call over to Mike McAllister who will talk about some of our very encouraging operating results we delivered during the quarter. You will also find additional asset-specific information in our updated corporate presentation that will be on our website shortly. Mike? -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [4] -------------------------------------------------------------------------------- Thank you, Doug. Let's start with the Permian. We're very pleased with the progress to date. We have moved from being an early adopter to elite innovator from above ground and below ground. For example, in Q2 our fracs were 75% larger than the average from 13 other Midland basin operators. We are evaluating the impact of these completions on well performance and returns. We are also piloting managed pressure flowbacks to test the impact on oil IP 180 and oil EUR, and, therefore, returns. Also we have discussed, on our last call we had introduced simultaneous drilling and completion operations on our horizontal pads. This has reduced our spud-to-initial-production times by approximately 30 days. This lowers costs and speeds time to positive cash flow, therefore improving returns. We've done this while overcoming the challenges associated with a new asset and unusual weather conditions in January and May. In Q2 we ran six horizontal and six vertical rigs placing Encana as the most active operator in the Midland basin. We rig released 23 net horizontal and 29 net vertical wells. The horizontals targeted the Wolfcamp and Spraberry zones in Martin, Midland, Upton, Glasscock and Howard Counties. Pilot wells include TXL and Davison wells, which are on production at 1,300 BOE per day and 1,100 BOE per day respectively. We're very focused on efficiencies. Our horizontal rig fleet has now been fully converted to fit-for-purpose rigs. The multi-well pads have dropped well costs by 25%. Our pacesetter well is now a 15-day drill. We are targeting $6.4 million drilling and completion costs. This includes approximately $600,000 of incremental cost associated with higher intensity completions. As we learn more on how these wells perform, we will refine the completions to deliver better returns. We have recently entered into an oil gathering agreement and we expect that about half of our production will be tied in by year-end. By enhancing the reliability of our production and significantly reducing trucking, our operating margins will improve by up to $2 per barrel. Production growth will accelerate in the second half of 2015, starting with 53 wells coming on production in Q3. July month to date, we now have 16 horizontal wells on production. This year's drilling program is evaluating our 5,000-well inventory across all five counties where we hold land at Midland basin. Results to date support our [type] curve assumptions. We currently have four horizontal and five vertical rigs working the Permian. We plan to keep drilling activity at above this level for the rest of the year. As I mentioned previously, we have been managing the flowing pressure of our wells. Our objective is to maintain flowing pressure above [bubblel] point by restricting production rates. We're evaluating the impact of this pressure management on our oil EUR and our oil IP 180 rates to maximize value. Generally speaking, we are drawing our wells down half as fast as was being done by our previous operator. With another 86 net wells expected to come on production in second half, we expect [premium] production to average over 50,000 BOE per day in Q4. It's now been one year since we acquired our position at Eagle Ford and we are very excited about how our team has grown the value of the asset. For example, by making significant improvements to our artificial lift systems, the decline rate on our base production has been reduced by about half of what we expected at the time of the acquisition. We also made great progress in reducing our DNC costs by almost 30%. When we acquired the position, DNC costs were $7.7 million per well; in Q2 we averaged $6.2 million. Costs are expected to fall further, $5.6 million in the second half of this year. In fact, we have just recently completed a [Dromgule] A 5 well at a cost of just $5 million. Although this was a little shorter lateral, at 4,320 feet, we are very pleased with this result. We're clearly running two rigs in the Eagle Ford and expect to continue at expect this level through the second half of this year. In the Kennedy area we have just brought onstream our Patton Trust South facility, which increases our processing capacity in the area by about 25,000 BOE per day. With our PTS facility now ramping up, we expect our total Eagle Ford production will be exceeding 50,000 BOE a day shortly. This represents 15% from when we began -- a 15% increase, I should say, from when we begin our development program in Q3 2014. We've also been doing a lot of work to expand our well inventory in the Eagle Ford. A year ago, we pegged our well inventory at about 400 wells. Since then we've drilled over 75 horizontal wells. Today, with our new understanding of the Graben, and assuming average well spacing of 30 to 40 acres, our undrilled well inventory stands at over 600 locations. This is a 70% increase since we acquired the asset. We expect our well inventory to further increase once we get a better working knowledge of the upper Eagle Ford. In our first-quarter conference call, we indicated that Graben had seen a 60% improvement in our 180-day production rates and the corresponding doubling of our EURs to about 500,000 BOE per well. Results from our Graben wells have continued to impress, with the best well so far peaking at over 1,300 BOE per day. We continue to dramatically reduce our costs in Duvernay. For the first time, our DNC costs are now below $11 million per well. We are now targeting below $10 million per well on our next pads. We're very excited about the impressive well performance we have seen from our multiwell pads. Our [16 of 11] well is on production at 2,000 barrels per day of condensate and 11.5 million a day of rich gas after 27 days of production. Our first four wells from our latest pads have been brought onstream at an average of 2,700 BOE per day, which is made up of 1,340 barrels a day of condensate and 8.2 million a day of rich gas. There are seven more wells to bring on from these two pads. We should also note that these production rates are producing at over 3,000 psi flowing pressure. These new wells are over and about the results that were featured in the recent independent research report that pegged our Duvernay supply costs at $46 per barrel. We've successfully repeated our dual frac spread program. By operating two frac spreads on the same multi well pad, we were able to maximize run time and pump nearly three times [the stages] per day than we can with a single spread. This innovation has resulted in approximately a $700,000 of savings per well. Furthermore, we were able to reduce our spud-to-initial-production time by about a month. The startup of our water infrastructure has also enabled us to reduce well costs by over $1 million per well and improve our operating margin by about $2 per BOE. We have now identified about 1,100 locations in Simonette alone. Our drilling program this year focused on very rich condensate window. These wells have condensate gas ratios between 150 to 250 barrels per million and represent 40% of our total inventory. Similar to other areas, we're working hard to improve well performance and we're seeing outstanding results. The graph on the lower left shows the average performance of eight wells that came on production in Q2. For these eight wells, production rates ramped up to an average of 1,000 barrels per day of condensate and 6 million a day of rich gas. In addition, we have four recent wells from the 12, 6, and 14 at 20 pads that have higher intensity completions. These wells are outperforming type curve expectations. The 16-11 well is included in this group and as I mentioned earlier, it's producing at 3,900 BOE per day after almost 30 days. The condensate rates for the three wells in the group are 1,500 barrels per day, 1,000 barrels per day and 800 barrels per day. Each of these wells is flowing at greater than 3,000 psi. In the current oil and gas price environment, we're frequently asked if our Duvernay operations are commercial. These results prove they clearly are. The unlevered return on the 16-11 well at today's prices is 50%. With improvement on costs and well performance combined with the favorable 5% royalty rate in the Duvernay, we are excited about the returns we are generating. In addition to the strong unlevered economics, we expect to see joint venture carry continue through to the end of 2016. We're pleased to report on a new condensate-rich area in the Montney, in an area we call Dawson South. Here we are seeing Montney wells in the heart of our Cutbank lands producing 300 to 400 barrels a day of condensate and 10 million a day of gas. One of the first wells we drilled in Dawson South has produced at a restricted rate of 300 barrels per day of condensate and 8 million a day of gas for over 200 days. As a reminder, prices for both Montney and Duvernay condensate enjoy (technical difficulty) Gulf Coast prices. Between Dawson South and our condensate-rich lands in Tower area, we now have greater than 1,100 condensate rich locations in Cutbank. When combined with our Alberta condensate-rich inventory, we now have more than 1,500 undrilled condensate-rich locations in the Montney. Our current DNC target is $6 million. In Q2 our average [cased] hole costs have been reduced by 20% compared to Q1. We have continued to see efficiencies and set a new record this quarter in our Tower area with a spud to release of just nine days. All five wells in the pad were 10 days or less spud to rig release. As you will see on the next slide, we have continued to optimize our completion designs and we're seeing 33% uplift in IP and EUR. The 15 to 27 compressor station came on production ahead of schedule and under budget. The station, which we operate, is part of our midstream arrangement with Veresen. 15 to 27 is designed to handle 200 million a day of gas and 2,000 barrels a day of condensate. As Doug alluded to, we have experienced some curtailment in production and restrictions on the TCPL system. Currently we're experiencing no curtailments. For the remainder of the year we anticipate there may be intermittent disruptions. We commonly hear our Montney position described as a dry-gas asset. In reality, we have built a large exposure to condensate in the asset and now have about 1,500 condensate-rich locations. 1,000 these locations are wells with greater than 40 barrels per million of free condensate. At 10 million a day, this equates to 400 barrels a day of condensate. Our total undrilled well inventory in the Montney now stands at 5,000 locations. The significant increase in liquids-rich wells in the Montney inventory gives us a new option in our portfolio for condensate growth from Tower, Dawson, and Pipestone. Various reports published by investment banks indicate we have drilled some of the best condensate rich and gas wells in Canada this year. In 2014, we reduced our cluster spacing to 80 feet and realized a 70% uplift in well productivity, compared to our original slickwater design. This year, the team is focused on doubling proppant concentration from 1,000, 2000 pounds per foot. By doubling the tonnage we expect an additional 33% increase in overall well productivity. Our latest completions have resulted in a restricted gas rates (technical difficulty) at 10 million a day for over 200 days. Our target is to increase the capability of our well sites to flow 15 million a day. These well results generating very competitive returns on an unlevered basis. In addition, we expect the joint venture partnership period to continue through to 2019. In Pipestone, we drilled two oil wells that came on production in the quarter at over 1,000 barrels per day. As well, we have a notable result in our [Carrion] program in the San Juan. We had six transverse wells come on production at 700 barrels a day, which is a 100% improvement over our original [oakleak] well design. I will now turn the call over to Sherri to discuss our financial results. -------------------------------------------------------------------------------- Sherri Brillon, Encana Corporation - CFO [5] -------------------------------------------------------------------------------- Thanks, Mike, and good morning, everyone. As Mike illustrated, we delivered solid results in the second quarter. We continue to build momentum in our operations and expect to accelerate liquids production growth through the second half of the year. We have delivered significant year-over-year growth in oil and NGL volumes with average production of about 127,000 barrels per day during the quarter, an increase of 87% compared to the second quarter of 2014, and about 5% higher than our Q1 volumes. Natural gas volumes were down about 38% year-over-year, largely due to the impact of our seasonal operating strategy at Deep Panuke, as well as divestitures, the TCPL outages, third-party- facility turnaround and natural declines. Q2 cash flow of $181 million declined by about $315 million compared to the first quarter of this year. Approximately half of that decline can be attributed to our seasonal operating strategy at Deep Panuke. The other half can be attributed to our $165 million cash outlay associated with the early debt redemption. This is expected to save us about $200 million in future interest expense. During the quarter, we received $140 million from net divestitures, which brings our year to date net divestiture proceeds to $978 million. This further simplifies our business and the assets sold had very little impact on both production and cash flow. We updated our hedging program during the quarter, layering on 2016 oil hedges. So now we have roughly 38,000 barrels per day at about $63 per barrel and slightly increasing our 2015 oil hedges to roughly 59,000 barrels per day at about $62 per barrel. Our natural gas hedge position remains unchanged. Similar to Q1 we recorded a $1.3 billion aftertax impairment charge that impacted our second quarter net earnings. The ceiling test impairment primarily resulted from the decline in 12- month average trailing commodity prices. This is non-cash charge; it is not reflected at the fair value of the assets. We remain on track to achieve our 2015 guidance and expect cash flow to come in at the mid to high end of the $1.4 billion to $1.6 billion range. When we combine our expected cash flow with the net divestiture proceeds we have already received this year, we expect cash inflows to exceed our planned capital expenditures and dividends by about $100 million. As we indicated last quarter, our plan was to invest roughly two-thirds of our capital budget in the first half of the year. Our Q2 year-to-date spending of almost $1.5 billion was in line with our expectations. We remain very disciplined and focused to our approached capital allocation. Maintaining financial flexibility is very important to us. If we have additional financial capacity in the second half of the year, strengthening our balance sheet would be our first priority. We would then consider accelerating activity in our four strategic assets, depending on market conditions. The only change to our guidance this quarter is the reduction of our DD&A rate, reflecting the impact of the impairment charge incurred during the quarter. If any additional impairment charges are incurred throughout the remainder of the year, our expected DD&A rate could be further reduced. Our focus on efficiency is a key part of building a high-performing and cost-efficient Company that is resilient through the price cycle. We are delivering on the efficiency and cost-reduction targets that are built into our guidance. This includes a 15% improvement, or about $300 million of capital cost efficiencies, plus $75 million of direct operating cost savings. We expect that two-thirds of the capital savings are sustainable going forward, even if commodity prices rise. These sustainable savings rise from the changes to how we drill, complete, and tie in our wells. For example, across the Permian, Eagle Ford and Duvernay, we will be self-sourcing proppant chemicals and managing the logistics in- house. Our work with bits, motors and casing design continues to drop days from our drilling programs. Our completion engineers continue to reduce maintenance times to drop days from our completion program. In the Permian and Duvernay, our simultaneous operations reduce the number of days on location. We've also recently completed a corporate restructuring to continue to align our structure with our more focused portfolio and disciplined capital investment program. Since we launched our strategy in November of 2013, we have reduced our staff count by 1,400 people and our overhead costs have been reduced by one-third or $300 million per year. Going forward, we expect that our clean G&A, excluding items such as restructuring costs and long-term incentive costs, will average around $60 million per quarter. Since 2013, our average interest expense is down by 100 basis points, due to our net repayments and implementation of our $2 billion US commercial paper program. As a result, we have reduced our interest expense on deck by one- third, or $150 million per year. Based on current debt levels, we expect that our interest expense on debt will average about $75 million per quarter. Our commitment to maximizing efficiencies has set us up well as we begin to plan for next year. When we combine durable cost reductions with the increased focus and capital allocation and a leaner workforce, the dollars we spend in 2016 should generate higher returns. Our debt position improved significantly during the quarter with the repayment of $1.3 billion of long-term debt. We also recently amended and extended our revolving bank credit facilities of $4.5 million, which are committed until July of 2020. We remain and expect to remain in compliance with the financial covenant in our credit agreements which requires our debt to adjusted capitalization to be less than 60%. As of June 30, this ratio came in well below that [covenant] requirement at 28%. Maintaining an investment-grade credit rating is an important aspect of our strategy. We've been very proactive in our efforts to increase liquidity and financial flexibilities, and we believe that we're well-positioned for 2016 and beyond. Our actions have strengthened our balance sheet, enhanced our credit metrics, and provided greater flexibility for the execution of our strategy. I'll now turn the call back to Doug. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [6] -------------------------------------------------------------------------------- Thanks, Sherri. As we look forward to the rest of the year, we remain intensely focused on operational execution and on capturing further efficiencies. We continue to drill better wells, capture sustainable cost reductions, and increase the well inventory in our four strategic assets. Our Montney is a low-cost, prolific play was growing liquids volumes. Our Duvernay is combining dramatic cost reductions and impressive well performance. Our Eagle Ford inventory has almost doubled as we improve efficiency. Our Permian is demonstrating strong well performance as costs drop and production growth accelerates. Our front-end-loaded capital program has positioned us to significantly accelerate liquids growth in the second half of 2015 and we remain on track to deliver our fourth-quarter production target of 270,000 BOEs per day from the Permian, Eagle Ford, Duvernay and Montney combined. The quality of these four assets, along with our proven technical expertise, is generating strong margins and robust returns. This makes us competitive at all points in the commodity price cycle. We continue to successfully execute and enhance our strategy. Our second-quarter results highlight the quality of our portfolio, the discipline of our capital program, and our commitment to maintaining a solid balance sheet. Thank you for the time and our team is now ready to take any of your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Greg Pardy, RBC Capital Markets. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [2] -------------------------------------------------------------------------------- Couple of questions. The first one is in terms of your targeted DNC cost you were outlining in your slide deck. Is your expectation you would be there by year-end or before? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [3] -------------------------------------------------------------------------------- Yes, Greg, I will make a couple of comments and hand it over to Mike. I think first in some cases we are already delivering, if you will, our pacesetter wells, already hitting our target cost. But in all cases we expect to be delivering average cost in those range by the time we reach the end of the year. -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [4] -------------------------------------------------------------------------------- Absolutely, Doug. Hello, Greg. Every one of our plays -- we actually have an example pacesetter well that's actually already hit those target costs and the teams are working on ideas in terms of how to drive those costs down further. We have a track record of performance on driving our drilling completion costs down and feel really confident about that. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [5] -------------------------------------------------------------------------------- Thanks for that. And the second question is that the big four plays, as you mentioned, about 270,000 BOE a day. It is substantially higher, obviously, than where you were in 2Q. Can you walk us through what needs to happen, I guess particularly in the third quarter to put you in good stead to meet those numbers? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [6] -------------------------------------------------------------------------------- Greg, if you look at the shape of our program this year, we had a very heavily front-end-loaded capital program and that is very obvious now that you see our first two quarters of capital. That was really driven by two factors. One is we actually closed down our capital programs in all of our assets other than those four. And that capital represented about 20% of our total capital and largely those programs are now stopped with very few exceptions. The second is -- the Permian is a great example. I think we entered the year running about six horizontal rigs and I think, as Mike already mentioned, we're running four and anticipate running that through the end of the year. That is the shape of the capital program. The production ramp-up, particularly in the Permian and the Eagle Ford, is second-half loaded, largely because of two things. One is is we have gone to multi well pads in the Permian. And because of that, obviously it takes a little longer to bring the wells on production because, in general, we are drilling four-well pads, have to drill the four wells and complete them. We have got to this simultaneous operations to speed that process up. The second thing we have done is, I think Mike mentioned this as well in his comments, we're pumping a lot larger fracs even than we originally planned when we bought the asset in November of last year. Those wells take about 60 days to clean up, 45 to 60 days to get to peak rate. But as Mike mentioned, we have got a big ramp-up in well count underway right now, so the wells he talked about we drilled in the quarter are largely just now coming on production. Then in the Eagle Ford, we had to expand one of our batteries quite significantly -- Mike mentioned this, Patton Trust South. That actually started up on the 13th of July. That is a massive facility, 25,000 BOE's a day. And I think we're -- Mike, maybe you can clarify, I think we're at about -- over half that full rate now in that new facility. -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [7] -------------------------------------------------------------------------------- Yes. We have 17 new wells; 32 wells in total. We have 31 of those 32 wells on production and ramping up, so we are in pretty good shape. In fact, in the Eagle Ford right now, in a total, we're just under 50,000 BOE per day on production. -------------------------------------------------------------------------------- Greg Pardy, RBC Capital Markets - Analyst [8] -------------------------------------------------------------------------------- Currently? Okay. You wouldn't have a current production number, like across the big four, would you? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [9] -------------------------------------------------------------------------------- Off the top of my head, I think the Permian is running around 40,000 BOEs a day just now. And I would have to -- we can probably follow up the other two, the Duvernay and the Montney. I think, as Mike mentioned, 2Q in the Montney was impacted by a third-party gas plant turnaround that took longer than they thought and then the [TCPL] NEB program. The good news is there those curtailments have recently been lifted and we are optimistic we will have less impact in the second half of the year. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Mike Dunn, FirstEnergy. -------------------------------------------------------------------------------- Mike Dunn, FirstEnergy Capital Corporation - Analyst [11] -------------------------------------------------------------------------------- A couple questions on the Eagle Ford -- and forgive me if they're a little bit ignorant -- but the Graben area, is there multi stack potential there? I don't think there's Austin Chalk in that area, but is that just lower Eagle Ford potential in that area? And then maybe just talk about what is included, if any, for Austin Chalk wells in the, I guess, over 600 well inventory total in the Eagle Ford? Thanks. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [12] -------------------------------------------------------------------------------- Mike, when we refer to the Graben area, it's in the oil window. For instance, this Patton Trust South that we've been doing a lot of work is in the gas condensate window. But in the Graben area, we actually -- when we're talking about our current inventory increase, that is really just driven by one now, believing that those Graben wells are going to be economic in the tighter spacing. We are planning to test the Upper Eagle Ford in the fourth quarter of this year. But we actually aren't counting -- our inventory does not count that and we have no Austin Chalk wells in that inventory. So both the Upper Eagle Ford and the Austin Chalk are both upside. -------------------------------------------------------------------------------- Mike Dunn, FirstEnergy Capital Corporation - Analyst [13] -------------------------------------------------------------------------------- In the gas condensate window, Doug, I am assuming it is on trend with where other guys have been drilling Austin Chalk wells; is that fair to say? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [14] -------------------------------------------------------------------------------- Yes. And Upper Eagle Ford wells. Some of our offset operators, as you have seen, have been testing both the Austin Chalk and the Upper Eagle Ford in that area. -------------------------------------------------------------------------------- Mike Dunn, FirstEnergy Capital Corporation - Analyst [15] -------------------------------------------------------------------------------- Okay. And so no immediate plans for you to test Austin Chalk? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [16] -------------------------------------------------------------------------------- Not right now, not this year. Right now our plans are to test the Eagle Ford this year. We're evaluating the Austin Chalk and we will see about whether we include that next year. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Mike [Rommel], UBS. -------------------------------------------------------------------------------- Mike Rommel, UBS - Analyst [18] -------------------------------------------------------------------------------- Just maybe a quick one on the Permian. Wondering if you guys still think you are on track to meet the low end of guidance there? Obviously, we have the first two quarters in hand. And you've talked about the fourth at 50,000. Difficult to get to the low end, if I do the math there. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [19] -------------------------------------------------------------------------------- Mike, I think where we are at, for the full year, right, we're a little behind where we thought we were going to be, largely because of going to multi well pads and the bigger fracs. But we still think, if you recall, we still believe we'll hit our 50,000 BOE a day, the number. Just as a reminder, when we bought the asset, it was producing 28,000 BOEs a day. We've now got it at 40 and we think our 4Q average will be at least 50. This is tricky space here. We're trying to do this stuff right. We're actually doing managed pressure flowbacks on our wells, so we're not trying to get the biggest number on the wall. We're trying to get the best return from the well. And that means how do we make sure we get the maximum AUR and the best rate over the first six months, not over the first 30 or 60 days. The other thing I will tell you is, when we inherited that asset, a number of basic processing systems weren't in place. We've had to put those in place, and those have taken a bit more time than we anticipated, a bit more of our Management time. These are little things like invoice management and production accounting and basic field operations were needing quite a bit of improvements, probably more so than we thought when we originally purchased it. -------------------------------------------------------------------------------- Mike Rommel, UBS - Analyst [20] -------------------------------------------------------------------------------- Obviously continuously changing, but fair to say you think you've got your hands around it now? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [21] -------------------------------------------------------------------------------- Yes, we do. One of these things -- when we took it over, obviously it was about six months after making our Eagle Ford purchase. We probably went into the Permian one thinking what we could jump in straightaway is optimizing development plans. And we had a bit more blocking and tackling to put in place in the existing production operations. That said, I've been really impressed with Mike and the team. I think we're already at hard at the front end of innovation out here. We've already tested 4,000-pounds-per-foot fracs. We're trying to see where the optimum is. Clearly in some parts of our portfolio, bigger is better. Here, we need to find out. As Mike mentioned, we're gathering the data. We're doing these multi well pads. Mike mentioned this -- you guys shouldn't overlook it -- this oil gathering system we've now put a contract in place to do, will add about $2 per barrel to our margin. And it will mean things like the weather impacts we saw in January and May should have much less impact in the future because instead of trucking oil we will be gathering it by pipe. We're trying to do this right. We see this as a critically important asset to the Company in the future, and it's early days, but I think we're on track to hit our 50,000 barrel target this quarter. -------------------------------------------------------------------------------- Mike Rommel, UBS - Analyst [22] -------------------------------------------------------------------------------- Just quickly on potential asset sales, obviously [4 to 7] core assets, I count 15. Fair to say you are still actively exploring a few options there? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [23] -------------------------------------------------------------------------------- Yes, Mike. You know my standard answer here, but we've been pretty clear, I think, all year that we think a tighter portfolio is the more efficient portfolio. We clearly have made massive change in it. We're really pleased with these four strategic assets. We also, at the time we launched the strategy, held some optionality in our portfolio. You can't hold that forever. So I think directionally, tighter is the right thing to do. But we actually never think it is wise to announce these things, either specific targets or asset sales. Clearly if we do something, we will announce it at the time we do. And I think Sherri indicated if we did make a significant divestment, how we would look at the use of the proceeds. -------------------------------------------------------------------------------- Mike Rommel, UBS - Analyst [24] -------------------------------------------------------------------------------- Last one for me. You talk about a base level of capital spending of about $2 billion required within the Company. As we look forward to next year, should we think about something similar or do you think you can bring that down? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [25] -------------------------------------------------------------------------------- It is a great question, Mike, because what we have said is that the core to the value creation we're trying to deliver here is what was 200,000 barrels a day equivalent in the fourth quarter of last year from our four strategic assets, going to [270,000], is to keep that growing. And what we have said is we would like to, if you will, defend a minimum $2 billion capital (inaudible). We do not have to do that, but we would like to do because that keeps that number growing. We're starting to look pretty hard at 2016, and one of the things that is encouraging us is we think we are going to end 4Q very strong, particularly on liquids production, which means we will enter 2016 strong. The second thing is, as Mike went through all the wells, our costs are down substantially and typically more than 20%, which means our capital will be more productive. And the third thing is that 20% or so of our capital we spent outside the four this year, I would be surprised if it is anywhere near that large next year. So all of those things should allow us to generate a capital program next year, even in a commodity price similar to today and to keep those four (inaudible). -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Benny Wong, Morgan Stanley. -------------------------------------------------------------------------------- Benny Wong, Morgan Stanley - Analyst [27] -------------------------------------------------------------------------------- Can you provide some color on where you think the Permian will exit this year and maybe comment on the momentum that you guys are expecting on the play into 2016? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [28] -------------------------------------------------------------------------------- Yes, Benny, as we mentioned, our 4Q average production, we are saying we should achieve 50,000 BOEs a day or greater in the fourth quarter. That is our exit rate we are anticipating. Largely, as Mike mentioned, that ramp-up is happening right now, so as we're bringing on new wells. Little bit early to say exactly how we will distribute capital in 2016, even though I suspect the Permian will get, of the four, the largest component next year. -------------------------------------------------------------------------------- Benny Wong, Morgan Stanley - Analyst [29] -------------------------------------------------------------------------------- In the Permian, wanted to get a sense of how many Lower Spraberry wells you have drilled? Is it the two that is in your presentation? And even if it is, can you give us some kind of initial thoughts on Horizon, how it compares to your expectation into other formations as well? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [30] -------------------------------------------------------------------------------- It was the two Lower Spraberrys that we have drilled so far, although we are very encouraged by the results that we're seeing in the Martin County. We'll continue to focus on that. Don't have the number in terms of the numbers we were planning on drilling here between now and the end of the year. But, yes, really encouraging results in the Lower Spraberry. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Stephen Richardson, Evercore ISI. -------------------------------------------------------------------------------- Stephen Richardson, Deutsche Bank - Analyst [32] -------------------------------------------------------------------------------- Doug, I was wondering if I could go back to the 2016 question about capital? Appreciate the service cost is down quite a bit. Can you continue, as you have wound down the rest of the portfolio outside of the big four in terms of capital, do you just -- do we just assume that you continue to starve the rest of the portfolio of capital into 2016 in a $50 to $60 oil world? Is that really the right assumption or is there some point where capital needs to come back? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [33] -------------------------------------------------------------------------------- Steve, I think that what has really changed after Thanksgiving, US Thanksgiving Day last fall, and the reset on oil price, was when we look at our portfolio, clearly we have a massive inventory of what we think are very high quality options in the four. In fact, I think our inventory is now over 11,000 wells in those four assets, so it is a pretty significant number. When you combine that with our strong belief that a tighter portfolio -- we don't want to be a single-play company. We don't believe that creates best value for our shareholders, but we also think a limited one's more efficient. And as Sherri outlined in our cost piece, since we started in the fall of 2013, we've reduced our workforce by over 1,400 people, by almost one-third, while maintaining similar levels of activity and largely that's been through a tighter portfolio. Clearly what we have to decide is where those assets fit and at what point they compete. That said, we've had some really interesting results. Before we brought our San Juan program to a close, we made some changes to how we were drilling those wells and we've doubled the IP 30s out there. We have to consider those things as we think about the portfolio going forward. But right now, in a low commodity price environment, we have got our capital very focused on the four. We think capital allocation is core, and as we have talked about, we do it centrally and we do it with what I think is incredible discipline. -------------------------------------------------------------------------------- Stephen Richardson, Deutsche Bank - Analyst [34] -------------------------------------------------------------------------------- The other question was if I look at what is obviously a pretty challenged environment for -- particularly on dry natural gas assets and negative netbacks across a lot of the legacy gas portfolio -- and appreciate Sherri's comments about potential for further TCPL disruption for the rest of the year. Do we see the potential for beyond Panuke shut-ins in the second half of the program? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [35] -------------------------------------------------------------------------------- At this point, I don't think so; not at today's gas prices. Our operating margins are all positive across our gas portfolio. And I should say our gas production is dominated by the Montney and at a $3 NYMEX price, which roughly translates to about a $2.40 ACO price, our margin is $1.15 per Mcfe. By the way, if you roll in what Mike talked about with the higher liquids yields we're getting and as we bring those wells in, that margin, we think, could grow by more than 50% with no increase in gas price. We see that is very competitive and I think if you model out what is in our deck with the EURs, the flow rates we're seeing and the condensate yields, you'll see those returns at today's ACO price actually quite attractive. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [37] -------------------------------------------------------------------------------- First question, the last quarter looked like the Permian CapEx rose about 50% and the other big three saw declining investment quarter over quarter. Can you expand on the drivers behind these decisions and what the spend might look like in the second half? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [38] -------------------------------------------------------------------------------- Jeff, good question. Right now, as we literally sit here today, we're actually expending capital in three assets right now: The Permian, the Eagle Ford and the Duvernay. We've largely completed our Montney program for the year. We have a bit more work to do in the Duvernay, but largely through the balance of the year, most of the capital is being spent in the Permian and the Eagle Ford. Just as an example, I think at the moment all of our rigs that we're running are currently in the Permian and the Eagle Ford today. Later in the year we anticipate bringing back several more rigs in the Duvernay. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [39] -------------------------------------------------------------------------------- Second question was going back to the managed price regime that you're doing. Are you doing that in all your Permian counties? And the EUR enhancements that may bring, are those already baked into the EUR guidance that you have on slide 6? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [40] -------------------------------------------------------------------------------- Yes. I will let Mike pick up the detail in there, but this was one of these -- we have done this in some of our plays, the DJs probably the one we've had the most experience with. And we actually do believe that staying above bubble-point pressure should improve -- the most important part of that AUR is the oil. That is what we are focused in on is how do we maximize the oil EUR, not just the BOE? And we think that drives it. But Mike can probably fill you in on across the five counties we operate in. -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [41] -------------------------------------------------------------------------------- Yes. We're using the same operating practices across all five counties. Actually we look at this across all of our plays, making sure that we are taking -- managing our drawdown pressures to not go below bubble point too early and thus changing the relative permeability in the near wellbore. The point of this, the reason we're doing this, is to maximize our oil production and not break through to gas too early. And we're in the evaluation phase right now in the Permian and we're going to see how that works out and basically to drive the maximum volume for the assets to Encana shareholders. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [42] -------------------------------------------------------------------------------- Jeff, I think the impact on the EURs, we just need to wait and see. In some of our plays we have seen it improves it and some, make sure you recover what you forecast. It's a little early, but we are clearly watching that. As Mike indicated, we've talked about this for several quarters. We actually think one of the core measures to look at on all of our wells is IP 180. We have to be real careful. I know IP 30s grab a headline, but what really drives the economics and returns is what's the maximum rate you can achieve in that first one or two years when you really dominate your returns. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [43] -------------------------------------------------------------------------------- If I understood what you were just saying correctly, it might end up being that the result of the managed program is perhaps a better mix, not necessarily a better absolute EUR. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [44] -------------------------------------------------------------------------------- It could be that and it could be a larger EUR. It could be both. But clearly what we want to make sure of is a little over -- in the Permian a little over 80% of our EUR is actually liquids, and that is the part we want to make sure we optimize. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [45] -------------------------------------------------------------------------------- Last question I wanted to ask was could you provide some further color on Pipestone? What is the oil gravity? What is the go-forward drilling plan, based on the two recent successes? I know you're not running rigs up there now, but does this encourage you to do more in the future and what does that look like? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [46] -------------------------------------------------------------------------------- Yes, we are really encouraged with what we have seen in Pipestone. We have 100 to 200 locations that we have identified in the oil window there. Wells are IP'ing at 1,000 barrels per day. The gravities are in the mid 40s, API gravity. And we're actually constrained right now with respect to facilities, so we're basically drilling to fill as we look at our program going forward and we're also looking at optimization of facilities with respect to -- -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Nick Luppick from Ultracore Capital. -------------------------------------------------------------------------------- Nick Luppick, Ultracore Capital - Analyst [48] -------------------------------------------------------------------------------- Two quick questions for me; first on the Eagle Ford, how many of your 600-well inventory is in the Graben? And the second question was about the Montney and the intermittent disruptions you are expecting going forward. In the event that this does carry on in 2016, the issues are not fixed yet, how is this going to affect your development plans there? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [49] -------------------------------------------------------------------------------- Let me touch on the takeaway, the TCPL interruptions, and while Mike grabs the rough number, we will see if we have it there on the Graben. Right now we are hopeful that the recent release of the curtailments holds for the full year. There's always a chance that could come in. And I know TransCanada has been talking a lot about this program as they have been implementing it, but at this point, we're not anticipating big disruptions in 2016. We are hopeful that largely we're through the worst of that. I think it impacted us in the second quarter -- about 33 million cubic feet a day was the impact in 2Q. And what we are signaling is there is some chance in the second half of the year, but we hope it is minimal and we hope 2016 is minimal. -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [50] -------------------------------------------------------------------------------- With respect to gross inventory, we have in the Eagle Ford, is of the 600 wells, 300 are in the Graben. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [52] -------------------------------------------------------------------------------- You've spoken on the cost decreases on the capital side. I wanted to see if you could spend some time on operating costs on a per- unit basis production? Plus transport looked like it was up substantially, even quarter on quarter, both in the US and Canada. And wanted to see if this was just a result of production mix and asset sales, if they were one off in your Outlook going forward? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [53] -------------------------------------------------------------------------------- I think the big driver -- I think looking forward and where we have indicated on guidance, we still feel confident. There's a bit of lumpiness in the shape of our operating cost just now, largely because of some stuff in the Permian and actually getting our arms around some of the basic processes and systems we have in place. We actually think those are going to drop in the third and fourth quarter, and we will still end up where we expected for the full year. I don't know, Mike, if you have anything else you want to add there on operating cost? -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [54] -------------------------------------------------------------------------------- Yes. No, for sure there, Doug. In the Permian, we had nonrecurring costs that hit us as well as really trying to address the processes and the systems that we had to get up to the Encana standard here. Very confident we will be on a commercial competitive level with respect to our costs going forward. -------------------------------------------------------------------------------- Brian Singer, Goldman Sachs - Analyst [55] -------------------------------------------------------------------------------- Thanks. And you have also spoken on some of the techniques on improving EURs in the Permian. I think you made a comment that your base decline rate in the Eagle Ford Shale has fallen by about 50%, and wanted to see if you could comment on whether that improves your EURs on a going-forward basis? If that is just for the legacy production and what the drivers are? -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [56] -------------------------------------------------------------------------------- Brian, it is a good insight here, because we really don't think this dramatically shifts EURs. What we really think it does is basically making sure you're optimizing your production. We thought there were a lot of opportunities in the Eagle Ford to improve how we were managing things downhole, so with artificial lift and basic production operations. And what we have done is deliberate that. It really hasn't shifted what the EUR is. It is making sure we're staying on it and not deferring production until later in the life. This is basic blocking and tackling, but it has been a nice upside since we've bought it. But at this point, I wouldn't add it on to the EUR. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Jeffrey [Lambujon], Tudor Pickering Holt. -------------------------------------------------------------------------------- Jeffrey Lambujon, Tudor, Pickering, Holt - Analyst [58] -------------------------------------------------------------------------------- I appreciate the detail on current production, but given the muted growth in the core quarter over quarter, can you speak more to quantify the impact of weather in the affected areas? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [59] -------------------------------------------------------------------------------- I'm sorry, Jeff, could you say a bit more? -------------------------------------------------------------------------------- Jeffrey Lambujon, Tudor, Pickering, Holt - Analyst [60] -------------------------------------------------------------------------------- Just looking to understand the quantitative impact of weather that you mentioned as far as production on the quarter. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [61] -------------------------------------------------------------------------------- Weather. Yes, I would say it was relatively modest. It actually hit us in three places. It hit us in the Permian in West Texas. Largely though we did do some pretty good planning around this, but it largely just delayed a little bit of the completions and drilling activity, just moving things around. In the Eagle Ford, it actually had a little bit of impact on our construction of our Patton Trust South. We had some flooding which caused a little bit of delay. And surprisingly enough, it impacted gas production in the Haynesville because the big rains in North Texas and Oklahoma, the rivers actually flow through Louisiana, and we had actually flooding in our Haynesville which required us to shut some production in. I don't want to overemphasize this. This is a minor impact in the quarter. I know a number of other people were hit by it, but most of the impact was a slight delay to bringing on new production. -------------------------------------------------------------------------------- Jeffrey Lambujon, Tudor, Pickering, Holt - Analyst [62] -------------------------------------------------------------------------------- On the CapEx, can you provide a range for Q3? Just given the focus core activity through year-end that you mentioned and the reduction in non-core spending going forward? Just trying to better understand the trajectory on a quarterly basis going forward into the end of this year. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [63] -------------------------------------------------------------------------------- I think, as Sherri indicated, we're still on track to be within our guidance. I think 3Q will be slightly larger than 4Q, but not by a lot. As we mentioned earlier, we're largely -- most of our activity now is in three of our assets for the remainder of the year: The Permian, the Eagle Ford and the Duvernay, with the Permian being the biggest piece of that. I think you can look at the remaining balance to our guidance and say we will spend slightly more of that in the third quarter and a little less of that in the fourth quarter. -------------------------------------------------------------------------------- Jeffrey Lambujon, Tudor, Pickering, Holt - Analyst [64] -------------------------------------------------------------------------------- Last question for me, specifically on the Permian, just looking at the blended type curve coming in at the high end of your previous range, can you provide some additional color outside of the highlighted wells just on leading-edge completions and how productivity looks in those wells that you are drilling now versus the type curves at this point? -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [65] -------------------------------------------------------------------------------- We're still in a learning mode. What we have done is to really test the boundaries with respect to completion size and going from what was a 1,300 pound per foot, we've tested all the way up to 4,000 pounds per foot. So what we're finding is that, as I think Doug mentioned earlier, our cleanup time frames are going anywhere -- shortest would be 15 days, but we're actually going all the way out to 60 days before we hit those peak rates. We're getting to our type curves. It is taking a little bit of time to ramp up to that point. One of the benefits -- and this is a benefit that we actually saw in the Eagle Ford when we went to larger fracs, is it actually shallowed our declines. And that would -- thinking giving us stronger EUR. So that is one of the reasons we're doing that. It is still work in progress. We want to find that optimum design to get into the optimum return. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [66] -------------------------------------------------------------------------------- Jeff, how this is actually showing up -- and we have seen it in a couple of our places -- when you combine that with managing the pressure drawdown, what it means is we actually do not have much decline in the first few months of production. So instead of really large IP 30s, what you see is flat or no decline for the first several months before you go on to decline. And that is what gives you high -- potentially higher EURs and higher AP 180s. It is not that the IPS maybe will jump up to 2,000 barrels a day, it's actually that wells will come on at 1,000 and stay there for quite some time. -------------------------------------------------------------------------------- Operator [67] -------------------------------------------------------------------------------- Bob Brackett, Bernstein. -------------------------------------------------------------------------------- Bob Brackett, Sanford C. Bernstein & Co. - Analyst [68] -------------------------------------------------------------------------------- Quick question. What is the level of confidence you have in that guidance number, the [270,000] barrel oil equivalent for the four Q4 assets? Is that a coin flip? Is it 90% certain? Is it in the bag? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [69] -------------------------------------------------------------------------------- Bob, it is a lot is what it is. We obviously give this stuff -- we're paying a lot of attention to it. We're been saying this for a while, that we would hit the [270] and our best estimates are we will do that. We have line of sight to what it takes to get there in terms of activity levels and programs. Clearly there's always the chance that something doesn't turn out like you expect, but our best view at the moment is we will hit that number by -- that is a 4Q average number is what that is. It obviously represents a big growth year-over-year, which is what we are targeting. -------------------------------------------------------------------------------- Bob Brackett, Sanford C. Bernstein & Co. - Analyst [70] -------------------------------------------------------------------------------- A follow-up on the self-sourced proppant. Can you talk a little about that? Is it mines you have acquired? Do you ship it yourself? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [71] -------------------------------------------------------------------------------- What we do there, Bob, is -- we don't own mines; we don't own rigs and frac fleets. We don't think that is the best way to maximize value. But we do think in our completion activities, having the relationship with the sand mines ourselves and then managing the logistics of getting it all the way to our jobsites maximizes the value. That's what we do. We have had this in place for a while and as we've made the changes to our portfolio, we've moved those relationships around. For instance, some of the sand that, late last year, we were delivering into the DJ is now being delivered into the Permian and into the Eagle Ford. We don't own sand mines, but we do contract directly with sand mines. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- David [Metes], Morningstar. -------------------------------------------------------------------------------- David Metes, Morningstar - Analyst [73] -------------------------------------------------------------------------------- I believe I heard in your prepared remarks that if you were to get any incremental capital, for instance, from an asset sale, then the first priority would be to take care of the balance sheet and then some acceleration in the four core plays. I guess my question is, what would it take to allocate capital to the San Juan, the TMS and the DJ at this point? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [74] -------------------------------------------------------------------------------- It is one of the things we're looking at very carefully as we start -- as Sherri mentioned, as we start to look towards 2016 and beyond. I think, with respect to the San Juan, as Mike mentioned, really strong recent well results. We're actually doing what we call a deep dive on the asset and say what's our current view and has it shifted with this recent improvement in well performance and where would is sit and compete for capital? With the others at the moment, what we think is we need to take a pause because the four -- what we call our four most strategic assets are the ones that we think really drive the value. The DJ is a very solid asset with good returns in today's environment. We've got a great track record there. In fact, I think one of the consulting houses not too long ago actually issued a report saying we had the most economic wells in the play. When we're looking at the future, we say what is most important strategically to the Company, particularly in this part of the price cycle? And we think those four strategic assets are the place to put capital and we are evaluating then where do our other assets fit -- both compete for capital and fit in the long term. -------------------------------------------------------------------------------- David Metes, Morningstar - Analyst [75] -------------------------------------------------------------------------------- You mentioned in your news release the credit facility that is being updated and increased until 2020. Is that guaranteed until 2020 or is it subject to redetermination in the interim? -------------------------------------------------------------------------------- Sherri Brillon, Encana Corporation - CFO [76] -------------------------------------------------------------------------------- No, that is guaranteed until 2020. We can basically look at rolling over renewal each year. And, like I say, it's a nice thing to have in place given the uncertainty and making sure that we have adequate liquidity. -------------------------------------------------------------------------------- Operator [77] -------------------------------------------------------------------------------- John [Hennerlin] of [Generale]. -------------------------------------------------------------------------------- John Hennerlin, Generale - Analyst [78] -------------------------------------------------------------------------------- Close enough. For the Permian gathering contract that you signed, is that with Medallion? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [79] -------------------------------------------------------------------------------- [Rene Zimlock] is here with us, runs our Midstream Marketing and Fundamentals Team. I'll let her describe what we've put in place. -------------------------------------------------------------------------------- Rene Zimlock, Encana Corporation - Manager, Midstream Marketing and Fundamentals [80] -------------------------------------------------------------------------------- Yes it is. We run a very competitive RFP process, which is something Encana typically does, and so we have contracted with Medallion. And we're very encouraged with the terms that we were able to achieve in that contract and we're really looking forward to a long-term relationship with them. -------------------------------------------------------------------------------- John Hennerlin, Generale - Analyst [81] -------------------------------------------------------------------------------- Regarding the Eagle Ford decline rates, Doug, what is the base decline rate now? You said you dropped it by 50%; what is the base? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [82] -------------------------------------------------------------------------------- I'm going to look to Mike to see if he can help me with that. If we cannot grab it here quickly, we can follow up with you after the call. Mike, do you -- -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [83] -------------------------------------------------------------------------------- We have done a tremendous job here in terms -- I don't have the decline rate at my fingertips, but we have done a tremendous job focusing on the base, looking at our official lift systems and we are shallowing that base decline. I just don't have the number. -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [84] -------------------------------------------------------------------------------- What we will do is follow up with you on that, but across the portfolio this year we have actually cut about two points off and I think it is -- what -- about 31%? -------------------------------------------------------------------------------- Mike McAllister, Encana Corporation - COO [85] -------------------------------------------------------------------------------- Actually on a budget basis, we have a 31% base decline across all of our assets and we have shallowed that down to 28%, so from 31% to 28%. -------------------------------------------------------------------------------- John Hennerlin, Generale - Analyst [86] -------------------------------------------------------------------------------- Last one for me is on your gas gathering costs. If you look at the US, you're running about $2.30 for gathering and processing. How much of that is fixed and is there any way to renegotiate since it is kind of high? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [87] -------------------------------------------------------------------------------- It is actually place by place and it all depends on where the market is and where capacity constraints do or don't exist. Clearly in some parts of our system, the world's moved on and things like the Marsalis showed up and moved the market to a different place where some of those contracts today, unfortunately, you would call them out at the market, so you can't renegotiate them. And in other places you might be able to do so. Largely, I would assume where we have been able -- where we can make a difference, we have. The big thing we can do, and Rene and her team does, is in a number of those places we have excess capacity and we trade around that capacity to claw back a bit of those fees. We do that as an ongoing basis. -------------------------------------------------------------------------------- Operator [88] -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers. -------------------------------------------------------------------------------- Jeffrey Campbell, Tuohy Brothers - Analyst [89] -------------------------------------------------------------------------------- I just wanted to ask a quick question and that is are you planning to use the Duvernay dual frac spread approach elsewhere in the portfolio? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [90] -------------------------------------------------------------------------------- I think one of the things -- you have to look at where you can. This thing -- I think you guys know we use what we call our resource play hub, our RPH model. One of the elements of that model is how you integrate your systems like your water system, and your production systems and these things. What allows us to do that in the Duvernay is a combination of things. One is we have piped water to pads. You can actually hall that water in a day. Second thing is you have to be able to store large amounts of sand on location, which is something we do in a lot of places. But clearly what we are looking at and what we actually have designed into our organization as a way to move ideas around. So the real question is is can -- do we have the system in place in other places to be able to deliver the water and the sand? I think, Mike, we were pumping over 100,000 barrels of water a day and I think -- what -- close to 1 million pounds of sand a day in that. So you actually have to have the systems in place to do that. You can't run that many trucks. -------------------------------------------------------------------------------- Operator [91] -------------------------------------------------------------------------------- Barbara Bentaski, Indenda Capital. -------------------------------------------------------------------------------- Barbara Bentaski, Indenda Capital - Analyst [92] -------------------------------------------------------------------------------- I apologize if this has been covered, but it is a question around the TCPL outages. If you could speak to the volumes that were off-line in Q2 due to those outages and also whether your price was affected? And what sort of volumes you are budgeting for Q3 and Q4 that might be impacted? I guess, importantly, how predictable is that maintenance on TCPL and what level of confidence do you have for the second half that you might not get affected again? -------------------------------------------------------------------------------- Doug Suttles, Encana Corporation - President and CEO [93] -------------------------------------------------------------------------------- Barb, we did briefly cover this, but happy to repeat it. In 2Q, between the TCPL issues and an issue with a specter-operated gas plant, we had about 33 million a day offline. Right now we're not being curtailed at all in the TransCanada system. We don't anticipate large volumes the remainder of the year. All we had done is flagged it is a risk, but we don't anticipate that will be significant going forward. As far as price, the only real impact on price is if you decided to try to move your gas into different markets and therefore received a different price for the gas, but it wasn't a significant issue. It is more a volume item. Before we wrap up, I just want to mention a couple of things. We have made a deliberate shift this quarter to disclose a lot more detailed technical information. We have had that request from many of you. I think you will see in our presentation today, we gave a lot more operating results. And, in addition, when you look at our corporate deck at our website, which I think is just about to be loaded, it has a significant increase in the amount of technical information on each of our four most strategic plays, so I would encourage you to take a look at that. I just want to close by saying thanks to everyone for being very generous with your time this morning and look forward to talking about some very strong results in the third quarter. -------------------------------------------------------------------------------- Operator [94] -------------------------------------------------------------------------------- Thank you very much, folks. Our conference call is now complete.
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