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Understanding Encana’s Hedging Activities

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Encana’s hedging advantage

In 1Q16, natural gas hedging activities increased Encana’s (ECA) average realized natural gas price by $0.45 per Mcf (thousand cubic feet).

As we saw in the previous part of this series, excluding hedges, the 1Q16 average realized price of ECA’s natural gas production was $1.73 per barrel. This means that commodity hedging activities increased ECA’s average realized natural gas price by ~26%.

Per ECA’s 1Q16 interim report, revenues from oil, natural gas, and natural gas liquids sales totaled $753 million in 1Q16. Cash settlements related to oil and natural gas hedges increased its revenue by more than $171 million in the quarter.

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Encana’s 2016 hedges

For 1Q16, 2Q16, 3Q16, and 4Q16, Encana has fixed price swaps on natural gas for 889 MMcf (million cubic feet) per day at a weighted average price of $2.67 per MMcf.

For 1Q16, 2Q16, 3Q16, and 4Q16, Encana has variable price hedges (two-way collars) on NYMEX natural gas for 335 MMcf per day. As of May 18, 2016, for the NYMEX natural gas price of $2.00 per mmBtu, these variable price hedges would result in realized prices of $2.22 per Mcf.

Overall, as of April 26, 2016, Encana had derivative coverage for ~85% of its forecast natural gas production for 2016.

Encana’s production costs

In 1Q16, ECA’s production costs, which include LOE (lease operating expense), transportation, processing expenses, and production taxes were $12.24 per boe (barrel of oil equivalent), ~8% lower than in 1Q15. In 1Q16, ECA’s operating expenses were ~$4.56 per boe, ~17% higher than its operating expenses of ~$3.87 per boe in 1Q15.

For 1Q16, other S&P 500 (SPY) upstream companies ConocoPhillips (COP), Marathon Oil (MRO), and Devon Energy (DVN) had LOEs of $9.42 per boe, $10.77 per boe, and $7.12 per boe, respectively.

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