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Encana Performs Better with 1Q15 Cash Flow

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Positive cash flow from operations 

Previously in this series, we learned that Encana (ECA) reported a $1.7 billion net loss in 1Q15 as opposed to $116 million in net income in the same quarter a year ago. However, its operating cash flow was better than its net income suggests.

Encana’s (ECA) 1Q15 cash flow from operations—or net income adjusted with non-cash items such as depreciation, depletion, and amortization, impairments, deferred income tax, gain and loss on risk management, and other items—was $482 million, or 49% less than the $943 million it recorded in 1Q14.

In 1Q15, operating cash flow from the sale of liquids in the US increased by 51% over 1Q14. However, cash flow from oil and gas sales in Canada, and natural gas sales in the US, decreased substantially during the period, as the graph above shows.

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What helped Encana’s operating income in 1Q15?

Encana has increased productivity and cost efficiency through simultaneous drilling and completion operations on multi-well pads in its resource plays. In 1Q15, the company realized ~$700,000 per well in cost savings compared to 4Q14 well costs.

In the Eagle Ford, the company reduced normalized drilling costs by 15% over 4Q14. In the Duvernay, Encana reduced completion costs by ~25% and drilling costs by ~45%. In the Montney, Encana realized a $1 million reduction in drilling and completion costs over the same period.

In 1Q15, falling crude oil prices have led to a sharp decline in the income of many upstream companies, including Matador Resources (MTDR), WPX Energy (WPX), EQT (EQT), and Cenovus Energy (CVE).

WPX Energy accounts for 1.6% of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

Impairment charges deflate net earnings

In 1Q15, Encana recorded $1.22 billion in pretax property impairment charges. These impairment charges reflect the effect of lower commodity prices in the US, which have reduced proven reserve volume and value.

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