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EnCana Corporation (NYSE:ECA)

2014 Guidance Conference Call

December 11, 2013 9:00 AM ET

Executives

Ryder McRitchie – VP, IR and Communications

Doug Suttles – President and CEO

Mike McAllister – EVP and President, Canadian Division

Sherri Brillon – EVP and CFO

Analysts

Mark Polak – Scotia Bank

Greg Pardy – RBC Capital Markets

Chris Feltin – Macquarie

Jeffrey Campbell – Tuohy Brothers Investment Research

Mike Dunn – FirstEnergy

Arthur Grayfer – CIBC

Operator

Good day, ladies and gentlemen and thank you for standing by. Welcome to Encana Corporation’s 2014 Guidance Conference Call. As a reminder, today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session.

Members of the investment community will have the opportunity to ask questions. (Operator Instructions). Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Encana Corporation.

I’d now like to turn the conference all call over to Mr. Ryder McRitchie, Vice President of Investor Relations and Communications. Please go ahead, Mr. McRitchie.

Ryder McRitchie

Thank you, operator. And welcome, everyone to our conference call. This call is webcast with slides and the slides are available on our website at encana.com if you’d like to print them.

Our team will be speaking to you from a number of locations today, from Calgary and Denver and California. So, I appreciate your understanding that the sound quality may vary slightly depending on who is speaking from what location.

Before we get started, I must refer you to the advisory regarding forward-looking statements contained in the news release, and at the end of our webcast slides as well as the advisory on Page 39 of Encana’s Annual Information Form dated February 21, 2013, the latter of which is available on SEDAR. In particular, I’d like to draw your attention to the material factors and assumptions in those advisories.

Encana reports its financial results in U.S. dollars and U.S. protocol. Accordingly, any reference to dollars, reserves, resources or production information in this call will be in U.S. dollars and after royalties, unless otherwise noted.

This morning, Doug Suttles, Encana’s President and CEO, who will discuss the company’s 2014 guidance and help build upon the new strategic direction we announced in early November. Highlights and our strategy development process. Following the slide presentation we will have time for Q&A.

And in addition, our guidance document that we’ve posted in addition to our guidance document that we posted on our website, there are additional tables that give you further detail on our guidance in the supplemental portion of the slide presentation.

I will now turn the call over to Doug Suttles, Encana’s President and CEO.

Doug Suttles

Thanks, Ryder and good morning everyone. I’m excited to share with you this morning, our vision, strategy and goals as set forth in our 2014 guidance. This first slide is a recap of our high level vision in the strategy components that we laid out recently.

Our vision is to be the leading North American resource play company through a disciplined focus on generating profitable growth we will strive to sustainably grow shareholder value.

So what does this look like here at Encana? We are looking towards achieving a balanced liquids and natural gas portfolio, growth from a limited number of very high quality plays in industry leading efficiencies. And of course we want to make it an exciting place for our employees to work.

On the next slide, it’s entitled the 2013 to 2017 strategy scorecard, I should just stop for a moment and say that I’m actually in a different location than the majority of the team and I’m not quite certain exactly what slide you’ll have in front of you at each point in time, so I’ll probably reference them as I go.

But slide 3, which is the 2013 to 2017 strategy scorecard, lays out the key elements around portfolio transition, operational excellence and balance sheet integrity. On portfolio transition, we’re focused on transitioning the asset base through a focused and disciplined capital allocation.

We expect to generate greater than 10% compound annual growth rate and cash flow per share through 2017. And by 2017 if price is similar to today, we would expect to be deriving 75% of our cash flow from liquids.

Operational excellence, we’ve reset our cost structures through focusing our business, generating higher net backs and margins and driving capital efficiency in our core growth plays.

On balance sheet integrity, our business model is not dependent upon asset sales. Over time we’re aligning capital and our dividends with our cash flow and we intend to maintain our investment grade credit rating.

The next slide, entitled our strategy scorecard, we’ve heard many comments from investors that 2014 is a transition year and that the excitement doesn’t show up beyond this year. I would actually disagree with that comment.

It’s an example of portfolio transition in our five core growth assets. We expect to generate approximately 45% of our pre-hedge upstream operating cash flow even though they entail only 25% of our production.

Our five core growth assets are expected to deliver 90% liquids production growth and 30% total production growth over the period. Pre-hedge upstream operating cash flow is expected to grow as I said earlier, at greater than 10% year-over-year, along with the ongoing portfolio rationalization.

On the next slide, our strategy scorecard focused on operational excellence, as we’ve talked about, we intend to invest in our high-margin barrels to deliver greater than 10% improvement in netbacks year-over-year, 2014 to 2013.

We intend to complete the appraisal of our two key emerging liquids plays the TMS and the Southern portion of the Duvernay commonly referred to as Willesden Green. And we intend to focus our – in our base areas or non-core growth areas on reducing the base decline to a range of 25% to 27% per annum.

On the next slide which, is the strategy scorecard around our balance sheet integrity. Our intent here is to align our capital with our cash flow and over time our dividends as well. We intend to as we’ve discussed before we intend to IPO, our Clearwater royalty business. And at this point we expect to repay on May 2014, $1 billion debt maturity, all while maintaining our investment grade credit ratings.

Our next slide which is entitled capital focused on growth assets, in 2014, we expect to invest between $2.4 billion and $2.5 billion that’s down approximately 10% on the expected final number for 2013, which is you will be well aware as considerably lower than our original guidance for the year.

We’re concentrating our capital in our five core growth assets, for 2014 we expect that to be approximately 75%. We have a much smaller proportion of our capital going to the base and maintaining option value. This is a combination of corporate capital and ongoing programs, limited ongoing programs in our non-core growth areas.

Longer term, we continue to focus our capital allocation in our core growth place, be disciplined with our investment, yet retain gas optionality from assets that could be quite profitable and competitive if gas prices recover in the future.

The next slide, which is entitled focused on growth value, not volumes and I would stress that point, this is core to our strategy. This is a very important slide and illustrates how our strategy is intended to deliver value to our shareholders.

The investments are focused on high net bank, high return projects. For example, in 2014, our base production which in this slide is shown in blue, is expected to deliver upstream operating cash flow of approximately $1.90 per MCFE. Whereas, our five core growth areas illustrated in green are expected to deliver $4.20 per MCFE in 2014.

We define operating cash flow to be production revenue, less operating and processing cost before our hedging activity. You can see the quality that we’re investing into in our core growth areas. Over time, we’re very confident that this focus on core value instead of production will deliver sustainable value growth to our shareholders.

The next slide, 2014 guidance, the key elements and at this point I just say there is additional detail on guidance in the supplemental slides which are at the back of the pack, we don’t plan to cover those here in the call but there is considerably more detail in the pack available on our website.

This is a high level view of our guidance and how we expect our strategy to deliver results in 2014. This guidance is structured around the same commodity prices we’re seeing now in 2013, $3.75 per MCF NYMEX gas price and $95 WTI price. And it shows the power of our strategy on delivering financial results.

Before hedging, our upstream operating cash flow is expected to grow more than 10% year-on-year. This is the increased contribution from the five core growth areas in lower estimated operating cost across the business.

Our total reported cash flow is guided to be unchanged from 2014 as compared to 2013. At this point, we’re not expecting any significant cash tax recoveries and we are expecting lower hedging gains in 2014.

Our administrative expenses are 17% lower than 2013 excluding the impact of long-term incentives and restructuring charges. CapEx is forecast to be down as I said earlier approximately 10% over 2013 and taking into consideration the dividend is aligned with cash flow.

Estimated production on barrel of oil equivalent basis is essentially unchanged with higher liquids production volumes all offsetting small decline in gas volumes.

The next slide, which is 2013 to 2014 total liquids production. Some of you may have been surprised that the liquids production guidance is actually in the range of 70,000 to 75,000 barrels a day and in some cases it’s lower than market views.

Our team expects to deliver our exit rate, the lower end of our exit rate target for 2013, predominantly due to some operating problems with the gas plant and in the Wembley area in Canada.

Our ramp up in urea and liquids volumes is driven in large part by Gordondale area which has been a very successful portion of the Montney play for us in 2013.

We also should be noted have stopped funding a number of liquids plays which are not part of our five core growth. This obviously means that those areas will decline instead of grow. And then as we move our capital and focus it into five core growth areas, which are liquids rich that has some lag effect and you can see that in this slide as production starts to build rapidly beginning in the third quarter of 2014.

While companywide production is guided to decline slightly in the first half of the year, we expect to see measurable improvements in our cost structure and our margins during the first half of 2014.

The next slide, key objectives from our five core growth assets, and once again I guide you back to the supplemental information where there is additional detail on each on each of these five. But this tries to describe the key objectives in these five core growth areas.

In the Montney it’s about accelerating our liquids growth while continuing to focus on capital efficiency on this very successful play. In the Duvernay, we will move to pad based drilling in the northern portion, the K-Bob area and expect to reach a decision on commerciality for the Willesden Green over the southern portion of the Duvernay during the year. And of course as we’ve discussed with you a number of times, finalized the mid-stream solution for our Duvernay development.

In the DJ, it’s about accelerating liquids growth and continuing to focus on capital efficiency, in the San Juan, it’s about advancing efficient commercial development, accelerating liquids growth while finalizing our acreage delineation. And in the TMS, it’s about completing appraisal during the course of 2014.

It is important to note that in 2014, although the five core growth assets will account for only 25% of total annualized production, they are expected to generate 45% of our pre-hedge operating cash flow showing the value from these key areas.

The next slide, entitled strategy to deliver sustainable returns. To summarize, 2014 is a very exciting year for Encana, it’s the first year of our new strategy. We’ve had a lot of change over the past few months and we look forward and are excited about executing our unique strategy.

What you should expect form us in 2014 is improvement in our cash flow, generating higher net backs through our focus in our capital program completing the appraisal in the TMS and in the southern portion of the Duvernay surface hidden value through our Clearwater royalty IPO and maintaining a strong balance sheet.

Just to recap our strategy, our vision is to be the leading North American resource play company, through a disciplined focus on generating profitable growth we will strive to sustainably grow shareholder value.

Our focus is on high quality rocks and areas where we have both scale and running room where we can use our efficient development to drive value, while accelerating liquids and oil growth in our portfolio.

I’ll just stop at this point and thank our entire team for much of what they’ve had to participate with us in the fourth quarter including a sizable staff reduction which I should also note is now complete.

With that I’ll stop. And we’ll be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mark Polak from Scotia Bank. Your line is open.

Mark Polak – Scotia Bank

Couple of questions. First one, just maybe a bit more color on the trajectory of the liquids production you touched on some of the issues with the exit rate here. I’m just curious what sort of driving the decline in the first half of the year then a fairly sharp ramp up in the second half of the year that just sort of timing of the drilling program and the growth plays?

Doug Suttles

Yes, Mark, and I know that’s a good question. Just real quickly on 4Q exit rate which I mean, on year-end exit rate 2013. As I think you’re aware we’ve had very successful drilling program in an area called Gordondale and Montney play basically in oil Montney play.

But we have had some problems with a gas plant operated by ConocoPhillips which has had some impact in our production here in December, a little bit of weather impacts as well. And what that results in net-net is we’ll probably come in at the bottom end of the exit rate range which we’ve discussed earlier.

As you look in ‘14, the shape of the profile is largely driven by the focus on the capital. So what’s happening is in the non-core growth areas which did have – some of those did have liquids production. We’re obviously no longer putting capital into those areas. So instead of drilling there now we’re on decline.

And then in other areas for instance even in the Gordondale area of the Montney is we are working through our strategy, we hadn’t originally planned before the strategy were to focus our development in that area, clearly we are now. And so what has to happen in that area along places like the Duvernay and the acceleration in the DJ in the San Juan, it’s just the lag effect. We started investing now and it takes about six months before the volume begins to share well.

Mark Polak – Scotia Bank

Thank you. And then, second one from me is, just on the Montney. Looking at the budget announced today, comparing to what you guys were expecting back at the strategy rollout, I think it’s gone up a fair bit but still running 60 rigs. I’m just wondering where that additional capital is going into the Montney?

Doug Suttles

Yes, and the Montney, once again a good question, Mark. The Montney, really there is in some ways, there is two ways, two pieces to think about here. One is our Cutbank Ridge partnership with Mitsubishi and then also we have additional areas in the Montney which are not part of that partnership.

What’s happened is, we worked through the detail of the strategy is, we put, we continue to work with Mitsubishi on our Cutbank Ridge partnership. But even outside of that we put more emphasis on the liquids areas of the Montney and that’s what’s driven increased capital. So places like Gordondale, Pipestone and Tower areas, these are areas which are very liquids oriented and very attractive to investment to today.

Mark Polak – Scotia Bank

Great. Thank you very much.

Operator

Your next question comes from the line of Greg Pardy from RBC Capital Markets. Your line is open.

Greg Pardy – RBC Capital Markets

Thanks, good morning. And first off, great slide-deck so thanks for the details. Two questions for you, one is just around the capital program Doug, $2.45 billion. Is that a number that your essentially just trying to live within cash flow or are there some other decisions that kind of took back just a bit. And then, secondly with respect to the Duvernay, it certainly looks as though you’re hitting the accelerator there. Can you talk about the pace of the development that you’ll see in that play this year particularly at K-Bob?

Doug Suttles

Yes, Greg, appreciate the comments on the slides. I think when we look at the level of capital, clearly what we signaled is we need to live within our means. We’re not necessarily saying every single year will be balanced on our capital and dividend with our cash flow but largely it needs to be there. So that’s one consideration to set the quantum of capital to scale.

The second piece is when we looked at these core growth areas and we said what’s the most efficient pace of development, what makes sense? We actually found that this also is about the sweet spot to land it into. And that’s what ended up being the final piece.

In addition here there, obviously we’re trying to drive one of the benefits of focusing in five areas is driving efficiency, in other words getting more out of every capital dollar. That has some impact as well. But I think as we’ve talked about – as we’ve discussed the strategy, I would expect capital to increase as our cash flow increases year-over-year.

Remind me again, the second half of your question there, Greg.

Greg Pardy – RBC Capital Markets

Yes, just the pace of – what is your development program going to look like in K-Bob this year?

Doug Suttles

Yes, so in K-Bob, we’re doing our first and Mike McAllister is on the call, so I’ll take the first shot at this. He’s in a different location than me, but I’ll hand over in a second to him. But fundamentally we’re doing our first multi-well pad in the K-Bob area while we continue to do some additional one and two well pads there as well.

But the big thing, at least that I have my eye on, Greg, here is to show that we can drive the cost down consistent with our expectations here through multi-well pads. Mike, do you want to add to the answer there?

Mike McAllister

Yes, sure, Doug. Yes, so as Doug mentioned, our primary focus is going to be up in the K-Bob (inaudible) area, where we’ve got better than commercial sector performance, we’ve talked about those well results before.

So, of the 30 to 40 gross well that we’re drilling, majority of those would be up in K-Bob. And we’re running about 6 to 8 rigs. And we’ll also be going into resource play hub development fix well, pad development.

What also I’d like to say in the South Duvernay, sometimes referred to as Willesden Green. We have been seeing some encouraging results down there basically on type curve, type performance. So we’re encouraged with those results as well. But primary focus would be up in the North.

Greg Pardy – RBC Capital Markets

Okay. Thanks very much.

Operator

Your next question comes from the line of Jeffery (inaudible) from Tudor Pickering Holt & Co. Your line is open.

Unidentified Analyst

Good morning, just two questions from me. On your 2014 liquids guidance, does that include the startup of Resthaven in Q2? Is that still time in their and any general updates here on that would be helpful.

Doug Suttles

Yes, Mike, why don’t you pick up the Resthaven question if you would?

Mike McAllister

Yes. Resthaven does startup in actually I think we might be thinking more like Q3. But as mentioned consistent with our strategy we won’t be putting any new wells into that – into the Bighorn area or into the Resthaven area. So the major focus of our capital would be in the five core plays. We do have seen a number of wells in Resthaven that will be going through the new plant.

Unidentified Analyst

Okay. And then, one last on Deep Panuke, any update there on ops or how production is tracking in, in these plants for the couple of quarters going forward, please? Thanks.

Mike McAllister

Yes, do you like to handle this one, Doug or?

Doug Suttles

Yes, go ahead, go ahead Mike.

Mike McAllister

Okay. Yes, so, we’ve completed the repairs on the aiming contactor tower which I think I might have talked about previously. We had about 20-day tape outage. We’re back up and running and very encouraged with the results. We’re pushing up to 200 – up to over 290 million a day here yesterday. So, that’s really encouraging considering out on, I think at about $20 an MCF. So things are looking much better here for Panuke here going forward. So, we’re very encouraged.

Unidentified Analyst

Great. Thanks guys.

Doug Suttles

You bet.

Operator

Your next question comes from the line of Chris Feltin from Macquarie. Your line is open.

Chris Feltin – Macquarie

Good morning, guys. I was actually just looking for a little bit more color on the TMS. I know in the strategic view update you guys had a bit of a preliminary. I was just curious if the lower CapEx that you guys are ending up today that simply a reflection of the earlier of definition of this play and focusing more capital towards the Montney where there is a little bit more certainty. Just any color there you can provide around that would be great?

Doug Suttles

Yes, Chris. On the TMS, I would just say that the big goal is to complete appraisal and make a decision about whether we want to move forward with exploitation beginning in 2015. We think this level of capital and we’re doing a number of things to try to optimize and get the most out of our, spend.

We are actually, I think we’re about to restart drilling out there literally in the next few days, so we’re about to begin that. And as – I think I’ve mentioned a couple of times, the two big things we’re really looking for to complete appraisal is. Number one is, a bit more time on the production curves.

So we’ve been very encouraged with the last – the most recent wells and the changes to the completion design because we’re now seeing the IP 30s at or above the type curve but we want to actually see some production proof to the forecast type curve. So this will give that – and that’s also why we’re focused on ramping up drilling now so we get the maximum amount of data through the year.

And the second piece is, obviously our geoscientists have mapped out what they believe is the core of the play. But in my view we don’t yet have enough of – enough well data across that to confirm the Tier-1 area or the core of the core is what we think it is. So that’s the second objective, is to get the right area distribution of the wells.

But we actually think this level of capital, were some things we’re doing to maximize the leverage from the capital will allow us to make that decision by the end of the year.

Chris Feltin – Macquarie

Okay. That helps, great. Thank you.

Operator

Your next question comes from the line of Jeffrey Campbell from Tuohy Brothers Investment Research. Your line is open.

Jeffrey Campbell – Tuohy Brothers Investment Research

I’ve really had one question to focus on since you gave such a great answer on the Tuscaloosa Marine Shale. And that was with regard to the Montney, it looks like the comparing the November data and today’s data that your JV partner is contributing a much bigger spend than was originally outlined. And I was just wondering if you could provide some color around that? Thank you.

Doug Suttles

Yes, thanks Jeff. Mike, maybe you could fill in that – help with that question. I don’t think the proportionate amount of shift, but Mike maybe you can help with the detail on the Cutbank Ridge.

Mike McAllister

Yes. So the change that you would have seen from our previous data was that we hadn’t included Gordondale and the piece of Pipestone plays in for development here in 2014. So, the – and that’s about $400 million of the $800 million to $900 million we’ll be going into Gordondale Pipestone. So, it’s really we’ve added a couple of Montney assets into this data versus what you would have seen previous, I think does that help.

Jeffrey Campbell – Tuohy Brothers Investment Research

Yes, that helps. I mean, what I was referring to is, maybe I just misread it earlier, but it looks like that with the JV CapEx, the earlier estimate was it going to be something like about $800 million or $900 million spend. And now it looks like it’s up to $1.8 billion. So, it looked like a big jump, but maybe I misread it.

Mike McAllister

Yes. The actual JV contribution hasn’t changed with what we were anticipating for 2014.

Jeffrey Campbell – Tuohy Brothers Investment Research

Okay. Thank you.

Mike McAllister

Okay. Sorry about that, yes.

Operator

(Operator Instructions). Your next question comes from the line of Mike Dunn from FirstEnergy. Your line is open.

Mike Dunn – FirstEnergy

Thanks, good morning everyone. Just a quick modeling question. Guys, your guidance for cash flow next year relative to your pretax operating cash flow number, the difference is a bit wider than I thought. I’m just wondering if I’m missing some restructuring cost there. You’ve mentioned G&A, the admin cost guidance didn’t include restructuring. How much should we be factoring in for that and is there anything else I might be missing there? Thanks.

Doug Suttles

Yeah, Mike, I’ll take a quick stab at it and probably hand over to Sherri Brillon, and let her fill in the detail. I think that our – what we’re doing in 4Q here is taking a – and I think it was in the press release about $65 million after-tax charge for the structuring in ‘14.

The other thing, just to note here, particularly when we look at G&A cost, G&A cost, a little more than half is associating with people but then there is also things like as you know things like buildings and IT and other things that make that up. But Sherri, can you provide any additional help here?

Sherri Brillon

Yes, usually the difference between our operating cash flow and the total cash flow is things like any additional charges relative to midstream. G&A, interest expenses and the hedging impact tax.

Doug Suttles

Cash tax, yes.

Mike Dunn – FirstEnergy

Okay. I think that explains it. Thanks guys.

Sherri Brillon

Okay. Thanks.

Operator

Your next question comes from the line of Arthur Grayfer from CIBC. Your line is open.

Arthur Grayfer – CIBC

Hi, good morning. Just a quick comment, just for some more clarity on the Duvernay, there is comment at the total spend for the year is $1 billion to $1.2 billion including your partner to carry. But if you’re drilling 40 gross wells, that’s roughly $600 million in CapEx. Can you talk a little bit more about that – the difference between the total spend and the drawing capital?

Doug Suttles

Yes, Mike, do you want to pick that up?

Mike McAllister

You bet. Yes, so it’s going to be infrastructure cost. We are reporting a plant in at 15 and 31 that would be coming on-stream later in the year. So, there is share benefit facility cost, and I’m trying to find them. But I don’t have them in my notes here. But the difference would be facility and infrastructure cost that we would be putting in place. We have about $50 million a day plant to come on-stream here in Q3.

Arthur Grayfer – CIBC

And is that going to have deep cut processing capacity?

Mike McAllister

No, no, it will be simply referred we’re not going to going to deep cut. Okay. Does that cover your question, sorry?

Arthur Grayfer – CIBC

Yes, it does. Thank you very much.

Mike McAllister

Okay. Thank you.

Operator

At this time, we have completed the question-and-answer session. And we’ll turn in the call back to Mr. McRitchie.

Ryder McRitchie

Well, thank you everybody for joining us this morning and making time in your calendars. If you have any follow-up questions, please feel free to contact our investor relations team. And they’d be more than happy to help you. As for now, our call is complete.

Operator

This concludes today’s conference call. You may now disconnect.

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