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Could 4Q16 Mark a Low Point for Encana’s Production?

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Production beat

Encana’s (ECA) 4Q16 production came in better than expected at ~311 Mboepd (thousand barrels of oil equivalent per day). Better-than-expected production in 4Q16 helped Encana to beat the midpoint of its fiscal 2016 production guidance range of 340–360 Mboepd. For fiscal 2016, Encana reported production of 352.7 Mboepd.

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Declining productions

Sequentially, Encana’s 4Q16 production is ~5% lower than its 3Q16 production. On a year-over-year basis, Encana’s 4Q16 production is ~21% lower when compared with its 4Q15 production.

ECA’s year-over-year decline in production can be attributed to the ~49% reduced capital investments and divestitures performed in the last year. For fiscal 2016, ECA’s capital investments fell from ~$2.2 billion to ~$1.1 billion.

How Encana’s core assets performed in 4Q16 and 2016

Encana’s core assets include the Eagle Ford Shale and the Permian Basin in the US, as well as Montney and Duvernay in Canada. In 4Q16, Encana’s (ECA) four core assets produced 237.1 Mboepd, which equals ~74% of its total production. On a year-over-year basis, Encana’s 4Q16 production from these core assets was ~14% lower than its 4Q15 production of 274.4 Mboepd.

For fiscal 2016, Encana’s core assets produced 254.2 Mboepd, which equals ~72% of its total production. Encana’s fiscal 2016 production from its core assets is ~5% higher when compared with its fiscal 2015 production of 242.6 Mboepd.

Upstream companies Murphy Oil (MUR), ConocoPhillips (COP), Canadian Natural Resources (CNQ), and NuVista Energy (NVA.TO) are also active in Montney, Canada. Encana is the largest producer in Montney.

The SPDR S&P Oil and Gas Exploration & Production ETF (XOP) generally invests at least 80% of its total assets in oil and gas exploration companies.

Production guidance

For 2017, Encana (ECA) expects total production to range from 320–330 Mboepd, which represents a midpoint decrease of ~8% from production in 2016. Encana expects to return to sequential production growth in 3Q17.

In the next part, we’ll explore why crude oil prices affect ECA’s stock price.

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