Encana Corporation

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Montney Plants Ahead Of Schedule

Our Conclusion

Completion of Encana’s Montney gas plants is ahead of schedule and the company now expects Q4/17 production growth from the core four to be at the upper end of guidance for 25% to 30% Y/Y growth and for Montney liquids to more than double over this period. This is higher than our previous estimate of 27% Y/Y growth, which we have increased to 29%.

The earlier plant start-ups set up a stronger 2018, primarily driven by higher-than-anticipated liquids growth in the Montney. Our 2018 production estimate is ~395,000 Boe/d (54% gas), up from ~388,000 Boe/d (55% gas), which leads to a more sustainable outlook in 2018.
Arguably, there is AECO basis risk as Encana brings on so much gas into Western Canada (Encana has ~1/3 of the expected volumes from 2018 to 2020 exposed to AECO), which could affect the company’s sustainability, but assuming strip pricing we estimate 2018 cash flow to be $1.8 billion for a payout ratio of ~102%. We have increased our price target to $13.50 (from $11.50), based on ~7.2x 2019E strip EV/DACF.

What’s The Event?

Encana announced the start-up of the Tower processing plant on September 20, ahead of schedule and under budget. The two remaining plants under construction are also ahead of schedule. The 400 MMcf/d Sunrise processing plant is expected to start up by mid-October with throughput anticipated to ramp up throughout 2018. The Saturn processing plant is anticipated to have one of its two 200 MMcf/d trains in-service by year-end, followed by the second train in H1/18. We expected Tower and Sunrise to come on line in mid-Q4/17 and Saturn in mid-Q1/18, suggesting a positive bias to our estimates for Q4/17 and 2018 now with a quicker ramp in liquids volumes. The company also highlighted that it is on track to deliver on its 2017 guidance expectations despite the impact of Hurricane Harvey in Texas and maintenance on the TCPL system. Encana curtailed dry gas volumes and focused on producing liquids-rich gas to minimize the cash flow impact. We expect the company will continue to prioritize Montney liquids volumes in 2018 to support achieving its liquids
growth targets, suggesting the Veresen plants will not likely be full until year-end.