Image source: Encana Corporation.
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This past October,Encana (NYSE: ECA) proudly announced that it was about to embark on an ambitious five-year growth plan. Fueling that growth is the vast inventory of low-cost, high-return drilling locations that the company worked tirelessly to put together over the past couple of years. It believes that this inventory can grow its cash flow 300% by 2021, which it can use to fuel a 60% rise in output.
However, just a few short months into its growth plan, Encana is already exceeding expectations. These results put the company on pace to not only deliver robust growth in 2017, but it could soon be in the position to increase its five-year growth forecast.
Full speed ahead
Underpinning Encana's bold growth initiative is a goal to double its corporate margin by 2021, which will drive cash flow higher and allow the company to boost production. Initially, the company expected that its corporate margin would be $8 per barrel of oil equivalent (BOE) in 2017 and would reach $16 per BOE by 2021 due to an increasing oil mix, greater scale, and lower corporate costs. However, thanks to the robust early results of the plan, Encana sees its corporate margin expanding by more than $10 per BOE this year, which is 25% above target. Driving that margin expansion is the expectation that costs will come in lower than expected and the anticipation of higher volumes in the second half of 2017.
Speaking of production, Encana's initial guidance for 2017 was that volumes from its four core areas would grow 15% to 20%. However, it now expects those volumes to be at the upper end, or exceed, that range. Furthermore, it still sees 2018 volumes from the four core plays rising 30%, based on the assumption that crude averages $55 and natural gas is around $3. This forecast means the company is on pace to exceed its 2021 growth targets.
Image source: Getty Images.
Joining the club
Encana is now one of a growing number of shale producers that have quickly ratcheted up expectations just a few months into the drilling ramp-up. One of the most impressive examples of this came from leading driller EOG Resources (NYSE: EOG). In August, the company said that it could deliver 10% compound annual oil production growth through 2020 at a flat $50 oil price with that growth rate rising to 20% compounded annually at $60 oil. However, in November, EOG Resources raised its compound annual growth rate projections to 15% at $50 oil and 25% at $60 crude. Driving that upward revision, according to EOG Resources, is continued improvements in capital efficiency, thanks in part to gains from its recently closed Yates acquisition.
Permian Basin-focused Diamondback Energy (NASDAQ: FANG) also quickly revised its growth guidance. In October, Diamondback Energy released a preliminary outlook for 2017, which at the midpoint guided for production to rise 30% from 2016's average. The company also said that it had "the ability to drive multi-year organic growth, within cash flow on our existing asset base." However, just two months later, it announced a transformative acquisition that put it in a position to deliver more than 60% production growth in 2017 at the midpoint. Furthermore, Diamondback Energy said that its acreage position in the Permian "provides a runway for unprecedented growth for years to come."
As these examples show, shale drillers have found that their initial plans were rather conservative. That is because producers found more ways to drive down costs by capturing additional efficiency gains while also delivering better well results thanks to continued innovation. In addition, many drillers are supercharging these improvements by acquiring top-tier acreage to boost their position in key plays. These trends suggest that Encana might also find ways to drive enough improvements so that it can increase its long-term growth outlook.
Encana had barely started working on its 2017 growth plan when it realized that things were going much better than expected. This performance has the company positioned to deliver terrific results in 2017 even if oil prices do not budge. Meanwhile, given that a growing number of rivals have already ratcheted up their growth rates thanks to drilling improvements and accretive acquisitions, there's reason to be optimistic that Encana could increase its growth outlook before the end of the year.
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