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Related Issuers
Announcement:

Moody's affirms Encana's Baa2 senior unsecured rating; outlook stable

Global Credit Research - 02 Apr 2012

Approximately $7.7 billion of debt securities affected

Toronto, April 02, 2012 -- Moody's Investors Service affirmed Encana Corporation's (Encana) Baa2 senior unsecured rating and P-2 commercial paper rating. The rating outlook remains stable.

"The affirmation of Encana's ratings reflects its significant size, scale, and diversity of operations that afford the opportunity to generate significant alternate liquidity through asset sales, and should enable the transition to a more liquids rich production mix from existing property holdings without increasing debt levels," said Terry Marshall, Moody's Senior Vice President. "Encana's current production is about 95% gas, which is problematic at current low prices, but we believe Encana can successfully transition to more liquids production. Encana's track record as a first mover in new resource plays and a successful developer and operator are skills that should transfer to the development of more liquids rich opportunities."

RATINGS RATIONALE

Encana's transition to a more liquids rich mix will take two to three years before it begins to have a meaningful impact on Encana's cash flow. Encana's cash flow-based leverage metrics are weak for the rating, and will worsen through 2013 as cash flow weakens as hedged sales at higher prices roll off and burgeoning liquids production is insufficient to offset a very weak natural gas price environment. However, we do not expect debt to increase during this period as the company's approximate $2.4 billion cash balance and possible additional asset sales should be sufficient to cover negative free cash flow.

Encana's liquidity is excellent. We estimate that Encana had approximately $2.4 billion of cash at March 31, 2012, and has two undrawn senior unsecured credit facilities due in October 2015: C$4 billion and, at a US subsidiary, US$1 billion. Encana has a C$2.5 billion commercial paper program (nil outstanding), which is backed by the C$4 billion credit facility. Anticipated negative free cash flow through the first quarter of 2013 of about $800 million can be readily covered from cash on hand. The company will be well in compliance with its sole financial covenant and has no debt maturities until October 2013 ($500 million). Encana has demonstrated excellent alternative liquidity through asset sales, with substantial realizations since January 2011.

A rating upgrade is unlikely absent a significant upward move in natural gas prices and a conversion to a more liquids rich portfolio such that it appeared that the leveraged full-cycle ratio and the ratio of RCF to debt could approach 2.5x and 50% to 60%, respectively.

The rating could be lowered if Encana increases its debt as it transitions to a more liquids rich portfolio. The rating could also be lowered if the unleveraged cash margin appears likely to fall below $15 per barrel of oil equivalent or the ratio of retained cash flow debt appears likely to fall below 20%.

The principal methodology used in rating Encana Corporation was the Global Independent Exploration and Production Industry Methodology published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Encana Corporation, headquartered in Calgary, Alberta is an independent exploration and production company with primary operations in Canada and the U.S. and a significant focus on the production of natural gas.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Terry Marshall
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's affirms Encana's Baa2 senior unsecured rating; outlook stable
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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