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How Encana Can Benefit from Its Hedging Activities

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Hedge program

In order to protect its cash flows and ensure targeted returns, Encana (ECA) has an active hedge program. Encana is carrying out these hedges using financial instruments such as fixed price swaps, fixed price swaptions, two-way collars, three-way collars, and basis contracts.

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Fixed price swaps

For 2017, Encana has fixed price swaps on the NYMEX crude oil (USO) price for 35,000 barrels per day with a price of $52.20 per barrel.

Collars

For 2017, Encana has three-way collars on NYMEX crude oil for 25,000 barrels per day. In its collar strategy, ECA has sold (or short) call options with a strike price of $59.60, a bought (or long) put option with a strike price of $49.28, and a sold (or short) put option with a strike price of $38.50.

For 3Q17 and 4Q17, Encana also has two-way costless collars on NYMEX crude oil for 30,000 barrels per day. In its collar strategy, ECA has sold (or short) call options with a strike price of $56.05 and bought (or long) put options with a strike price of $46.22.

Upstream companies Bonanza Creek Energy (BCEI), Pioneer Natural Resources (PXD), EOG Resources (EOG), and Parsley Energy (PE) are also using a three-way collar strategy to hedge their 2017 production.

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Swaption

For 1Q17, Encana (ECA) has a swaption on NYMEX crude oil for 10,000 barrels per day. In its swaption strategy, ECA can extend 1Q17 fixed price swaps to June 30, 2017, at a strike price of $50.86.

Could ECA’s 4Q16 hedges result in profits?

Assuming a March 14, 2017, NYMEX crude oil price of $47.72 per barrel as a final settlement price, all of the above ECA’s hedges with the majority of hedge volumes could result in a profit. Fixed price swaps could result in a realized price of $52.20 per barrel, a profit of $4.48 per barrel. Even three-way collars could result in a profit of $1.58 per barrel.

On December 31, 2016, ECA had derivative coverage for more than ~70% of its forecasted 2017 production.

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