Feb 24, 2016
Executives
Brendan McCracken - Vice President, Investor Relations Douglas James Suttles - President, Chief Executive Officer & Director Sherri A. Brillon - Chief Financial Officer & Executive Vice President Michael G.
McAllister - Chief Operating Officer & Executive Vice President
Analysts
Benny Wong - Morgan Stanley & Co. LLC Greg Pardy - RBC Dominion Securities, Inc.
Jeffrey Campbell - Tuohy Brothers Investment Research, Inc. Jeoffrey Restituto Lambujon - Tudor, Pickering, Holt & Co.
Securities, Inc. Michael P.
Dunn - FirstEnergy Capital Corp. Brian Singer - Goldman Sachs & Co.
Michael Rimell - UBS Securities Canada, Inc. Jonathan D.
Wolff - Jefferies LLC
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to Encana Corporation's Fourth Quarter 2015 Year-End Results 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. Please be advised that this conference call may not be recorded or rebroadcast without the expressed consent of Encana Corporation.
I would now like to turn the conference call over to Brendan McCracken, Vice President of Investor Relations. Please go ahead, Mr.
McCracken.
Brendan McCracken - Vice President, Investor Relations
Thank you, operator. Welcome, everyone, to our fourth quarter and year-end 2015 results conference call.
This call is being webcast and slides are available on our website at encanca.com. Before we get started, please take note of the advisory regarding forward-looking statements in the news release and at the end of our webcast slides.
Further advisory information is contained in our most recent Annual Information Form and other disclosure documents filed on SEDAR and EDGAR. I also wish to highlight that Encana prepares its financial statements in accordance with U.S.
GAAP and reports its financial results in U.S. dollars.
So references to dollars means U.S. dollars and the reserves, resources and production information are after royalties, unless otherwise noted.
This morning, Doug Suttles, Encana's President and CEO; Sherri Brillon, our CFO; and Mike McAllister, our COO, will provide the highlights of our fourth quarter results and revised 2016 guidance before we open the call up for Q&As. I will now turn the call over to Doug Suttles.
Douglas James Suttles - President, Chief Executive Officer & Director
Thanks, Brendan, and good morning, everyone. Encana finished 2015 strong both operationally and financially.
As Sherri will discuss shortly, we have substantial liquidity and financial flexibility. Last year, we reduced debt by about $2 billion during what was a very challenging year for our industry.
We have worked hard to have a strong balance sheet and we intend to keep it strong. We also beat our production milestone in our core four assets – the Permian, Eagle Ford, Duvernay and Montney – which in combination produced more than 274,000 barrels oil equivalent per day in the fourth quarter.
The higher margin production from these four assets made up almost 70% of our total production in the fourth quarter. This was up from less than 50% just one year ago.
2015 also marked the third straight year of significant efficiency gains for Encana. By focusing on the core four assets and driving efficiency throughout the business, we delivered $383 million of cash flow in the quarter.
This, combined with our strong hedge position, meant that cash flow was flat from Q3 and Q4 even though prices fell dramatically. We have tremendous flexibility in our capital program.
As a result of the continued weakness in commodity prices, we are reducing our 2016 capital program by about 55% when compared to 2015. It is important to note that Encana also has a robust hedging program for 2016, and as a result, we have very minimal exposure to current commodity prices.
Reducing costs and capturing efficiencies continues to be an obsession heading into 2016. Later in the call, we will provide the details of our revised guidance.
Under the new plan, we expect to reduce cost by about $550 million when compared to 2015. Of that, $200 million to $250 million of cost savings are incremental from our previous guidance.
Our operating teams also continue to drive efficiency in each of our core four assets. As a result, these additional capital efficiencies will contribute a further $50 million of cash flow in 2016 versus previous guidance.
One of the other key highlights that Mike will touch on later is a significant reduction in our land retention vertical program in the Permian. This will save us a $100 million in capital this year but will still hold our core acreage.
Our production guidance for 2016 remains essentially unchanged despite the substantial reduction in capital. This is driven by the improvement in capital efficiency in the new plan as well as the inclusion of production from our DJ Basin asset for the first six months of the year.
As a result of these improvements, even the full prices remain low for the next several years, we are positioned to preserve value. Any asset divestitures would be an upside to this case.
We continue to take decisive steps in 2015 to manage through this challenging environment. These actions have made our business stronger, and we will build on that momentum this year.
Earlier in the year – or early-in-the-year response to lower-than-expected commodity prices, we reduced our 2015 capital program by 25% and challenged our teams to deliver capital and operating cost efficiencies of $375 million. They ultimately exceeded our target achieving cost savings of over $400 million.
Midyear 2015, we took action to realign our corporate structure and reduced our work force by approximately 20%. As announced this morning, we are expecting a further 20% workforce reduction this year.
This brings our total workforce reduction since 2015 to over 50%. Throughout the year, we executed a number of transactions that helped strengthen our balance sheet and created additional financing flexibility.
These initiatives included a CAD 1.44 billion bought deal offering using the proceeds plus cash on hand for the early redemption of $1.3 billion of long-term debt, $2.6 billion of non-core asset divestures completed and announced, and increasing and extending our credit facility out to 2020. We assembled an operating cost reduction task force which identified over 1,000 initiatives across the company to lower lease operating expenses.
As a result, we are targeting a 20% improvement over the next two years. I will now turn the call over to Sherri who will provide some details on our balance sheet and our fourth quarter 2015 financial results.
Sherri A. Brillon - Chief Financial Officer & Executive Vice President
Thanks, Doug. Financial flexibility and liquidity are essential to maintaining a sustainable business through challenging market conditions.
With this in mind, we took very decisive steps throughout 2015 to solidify our balance sheet and ensure that we are well positioned to continue executing on our strategy. We are one of the very few companies in our industry to reduce debt last year, which we lowered by $2 billion.
This has significantly lowered our annual interest cost and puts us in the enviable position of having no long-term debt maturities until 2019. I want to stress that our debt maturity profile is very long term in nature.
In fact, of our $4.7 billion of fixed long-term debt over three quarters is not due until 2030 or after. We have access to significant liquidity and are well positioned relative to our peers in this regard.
In addition to the $271 million of cash in our balance sheet at year end, we have immediate access to $3.85 billion of our $4.5 billion U.S. dollar denominated revolving facilities, which are in place until 2020.
These unsecured facilities are fully committed and cannot be unilaterally terminated by the lenders. There is one financial covenant on the facilities, debt to adjusted capitalization ratio not to exceed 60%.
In calculating the adjusted capitalization, it includes debt, total shareholders' equity and a fixed positive equity adjustment of roughly $7.7 billion relating to historical ceiling test impairments associated with the company's transition to U.S. GAAP from IFRS accounting standards in 2012.
Since the launch of our strategy, we have continued to improve this ratio, reducing it each year from 36% at year-end 2013 to 28% at the end of 2015. Let me reiterate that this is the only financial covenant on our credit facilities and they are not subject to any covenants related to cash flow, EBITDA, credit ratings, or reserves.
We are pleased that two of the three rating agencies which are currently covering Canada, Encana recently reaffirmed their investment grade credit ratings. We were recently downgraded to sub-investment grade by Moody's, but we see minimal implications of having a split rating.
There are no material cash costs, no changes to the structure of Encana's long-term debt and no impact to our credit capacity. As a result, we still have access to ample cash to support the efficient execution of our strategy to the current volatile market environment.
However, we do not intend to materially increase our debt levels through this part of the cycle. Balance sheet focus and strength was front and center at the strategy launch, and we'll continue to exercise strict capital discipline to preserve our financial strength.
Moving on to our Q4 results; we were very pleased with the production growth we saw from our core four assets; the Permian, Eagle Ford, Duvernay and Montney, which as Doug noted, exceeded our target. Their growth, coupled with our ongoing focus of reducing costs, had a significant positive impact on our financial results.
Despite the severe erosion of WTI and NYMEX prices, at $0.45 per share we delivered slightly more cash flow per share in Q4 versus Q3. Strong production growth from our high-margin core four assets combined with lower costs and our hedges more than offset the lower prices.
We delivered significant year-over-year growth in liquids volumes with average production of about 145,000 barrels per day during Q4, up over 35% compared with the same quarter last year. Natural gas volumes were down about 15% versus Q4 2014, largely due to the impact of divestitures, natural declines in our seasonal operating strategy at Deep Panuke.
Most importantly, production from each of the core four assets increased in the fourth quarter and in total grew 10% from 249,000 BOE per day in Q3 to 274,000 BOE per day in Q4. Significant cost reductions across the business contributed to our strong Q4 cash flow.
Last quarter, we specifically highlighted the cost savings we have achieved on our G&A and interest expense on debt. In addition, we've realized significant new savings in our transportation and processing, OpEx and production, mineral tax and other expense.
Later in the call, we will illustrate how we expect to further realize additional savings into 2016. During the quarter, we received $761 million from net divestitures, which primarily reflect the proceeds from the sale of our Haynesville asset.
For the year, net divestitures totaled over $1.8 billion, which when combined with the proceeds of our equity issue last March enabled us to reduce our net debt by about $2 billion to $5.1 billion at year end. We continue to opportunistically look at additional asset sales, and we are working towards closing our previously announced DJ Basin sale by the end of the second quarter of this year.
We recorded a $514 million non-cash after-tax ceiling test impairment charge that impacted our fourth quarter net earnings. The ceiling test impairment primarily resulted from the decline in 12-month average trailing commodity prices.
This non-cash charge is not reflective of the fair value of the assets. With our results this morning, we also announced our year-end reserves and resources.
Under Canadian protocol, our reserves replacement ratio in the four core assets was 233%. Please refer to our news release for further details on reserves.
I will now turn the call over to Mike McAllister who will provide some operational highlights.
Michael G. McAllister - Chief Operating Officer & Executive Vice President
Thanks, Sherri. We are very pleased with our operational performance during the quarter.
I am very proud of our team for exceeding our fourth quarter target of 270,000 BOE per day from our four core assets. With our focus on innovation, we've made significant strides in reducing capital and operating expense across the four core plays.
We continue to evolve our resource play hub model, applying techniques such as simultaneous drilling and completion operations and integrated water hubs to drive greater productivity and cost efficiencies. We remain focused on improving well performance and growing production.
In 2015, we have been actively testing reduced cluster spacing, high-intensity fracs, tighter well spacing and interference on stacked horizontals. Through optimization of well completions and the application of high-intensity hydraulic fracturing, the company is increasing initial production rates and delivering strong well performance.
In the Permian, the implementation of our resource play hub design and our fit-for-purpose rigs have resulted in a 30% reduction in both cycle time and D&C cost since we acquired the asset. Through the fourth quarter, we averaged $5.9 million per well D&C cost, which was actually our original 2016 target.
We continue to find efficiencies in all facets of the business. With a 12% reduction in LOE, additionally, we increased our realized prices by $1.50 per barrel through our midstream contract negotiations.
Well results indicate that Encana is tracking among the top-performing peers in the Midland Basin. Our R&D lab in the field has provided us with advanced understanding on spacing and interference for future development and validating inventory.
In the Eagle Ford, we again significantly grew production and reduced well costs. Production reached 59,000 BOEs per day in Q4, which is a 35% increase since we acquired the asset.
Overall, for the year, we have seen a 35% reduction in D&C cost, down to $5.1 million per well. We have continued to focus on operating cost opportunities.
The result is a 25% reduction in our LOE from the prior quarter. We have also drilled four of our Eagle Ford wells in Q4.
The early results are promising and could increase our well inventory in the Kennedy area by 90 wells. In the Duvernay, our focus has been on reducing well cost, cycle time and increasing production.
Our approach utilizing dual drilling rigs, dual fractures, targeted laterals, high-intensity completions and our water infrastructure. We hit record production levels in the Duvernay in Q4 as production increased by 75% from Q3.
In Q4, we continued to drive down our D&C cost. In Simonette South, our drilling cost averaged $4.4 million per well, 23% lower than our target cost in that area.
Encana continues to deliver industry-leading performance in the play. In the Montney, we actively managed transportation options over the quarter and minimized the impact of the TCPL curtailments.
These curtailments were lifted late in the quarter, and we do not expect any impact in 2016. We also brought on additional liquids-rich wells in the Tower area, which more than doubled our condensate production from Cutbank.
I will now turn the call back to Doug.
Douglas James Suttles - President, Chief Executive Officer & Director
Thanks, Mike. When we first issued our 2016 guidance in December of last year, there was a high degree of volatility in oil prices.
We said that if commodity prices weakened, we had the flexibility to quickly make adjustments to our program, and that's what we've done. We are committed to preserving the value of our assets and ensuring that our business is sustainable in a lower-for-longer price environment.
Accordingly, we have reduced our 2016 capital program to be aligned with the current price environment. We are now planning to invest between $900 million and $1 billion, a reduction of about 55% from 2015 and about 40% lower than our original 2016 guidance.
Despite this significant reduction of capital, total production guidance remains largely unchanged. We are taking a number of specific steps to further reduce cost and bolster cash flow.
Importantly, these savings are largely permanent and will have an even larger impact in 2017 as we will benefit from their impact for a full 12 months. I'll now turn the call back to Mike, who will go through the revised plan in each of our core four assets.
Michael G. McAllister - Chief Operating Officer & Executive Vice President
Thanks, Doug. Our 2016 program continues to advance our strategy by focusing capital on our core four strategic assets.
The Permian remains a key focus for Encana. We're allocating over half of Encana's 2016 capital to this play, running four horizontal rigs in the first quarter and two for the remainder of the year.
Our 2016 program will focus on drilling longer laterals, increasing the number of wells per pad, and retaining our high-quality acreage through our reduced vertical drilling program. We are targeting a $5.7 million D&C in well cost, which is 11% reduction from our 2015 average.
In the Eagle Ford, we will run one rig for the entire year. We will look to further expand our 600-well inventory by delineating the Upper Eagle Ford.
The 2016 D&C well cost target is $4.3 million, which is a 20% reduction from our Q4 cost performance. Annual production at Duvernay will grow significantly in 2016 as we bring the new 10-29 plant online by the end of the first quarter.
We plan to average two rigs in the play over the course of the year. We continue to aggressively pursue cost reductions in the Duvernay with the Simonette North D&C cost target of $7.9 million per well.
In the Montney, we will run an average of two rigs over the course of the year. As we shift our focus to more condensate-rich parts of the play, we still anticipate a liquids production growth rate of over 50% on a compound annual basis through 2018.
An operating cost reduction taskforce was assembled in December, and it identified over 1,000 initiatives across the company to lower our lease operating expenses. For example, we targeted greater than 15% savings on our water management.
This is primarily driven through an increased focus on recycled produced water across the entire company while minimizing our trucking and disposal cost. Efforts like this contribute to reducing our 2016 LOE by an additional $50 million since last guidance with a targeted reduction of 20% over the next two years, with the remainder of our portfolio only requiring 5% of our capital.
We will continue our seasonal operating strategy at Panuke and will shut in production during the summer months and resume operations in the late fall. I will now turn the call back to Doug.
Douglas James Suttles - President, Chief Executive Officer & Director
As discussed at the outset of the call, during the past two years, we've taken a number of steps to not only transition our portfolio to higher margin production. We've also relentlessly pursued an aggressive reduction in our cost structure.
We now expect our 2016 cost to be down about $550 million versus 2015. Of that, $200 million to $250 million is incremental savings from our previous guidance.
We've taken a number of steps over the past several months to actively reduce our transportation and processing commitments. For example, as a part of our Haynesville sale, the buyer agreed to assume all of our processing commitments and agreed to have us exclusively market their production to, in part, offset our remaining transportation commitments out of the basin.
Our updated guidance this morning includes over a $1 per BOE reduction in transportation and processing cost from our previous 2016 guidance. This represents a $75 million to $125 million decrease in cost in 2016 from what we were previously expecting.
As a result of the lease operating expense task force that Mike just described, we now expect 2016 direct operating cost to be down by about $50 million. Due to the lower price environment, we expect production, mineral, and other taxes to be down by about $25 million.
In July of last year, we communicated that our ongoing G&A costs have been reduced by 25%. We now expect total overhead cost to be down a further $50 million in 2016.
Our revised 2016 plan allocates our capital to deliver the best possible returns in a challenging environment while preserving our financial strength and the long-term value of our assets. We are taking prudent action of reducing our capital to under $1 billion.
As compared to our previous guidance for 2016, we've eliminated $100 million of capital by dramatically reducing our Permian vertical drilling program by working with the mineral owners. We dropped our cost structure by $200 million to $250 million, and we also expect to achieve over $50 million of additional cash flow from capital efficiencies.
These savings and efficiencies will be even greater in 2017 as we have the benefit of a full year with the new run rates versus the partial benefit we will realize this year. We also have protected our 2016 cash flow with a very robust hedging program, which means we have very little exposure to the low prices we have seen so far this year.
At February 19, 2016, Encana had hedged approximately 75% of our expected 2016 oil, condensate and natural gas production. Please refer to our news release for the full details of our hedge program.
While 2015 was a challenging year for the industry, we took action at multiple points throughout the year to better align our activities with market conditions and improved the overall sustainability of our business going forward. Our revised 2016 guidance reinforces our commitment to capital discipline and our ability to generate quality returns in a low price environment.
I hope you come away from today's call with three critically important messages. First, we have approximately $4 billion of liquidity, a substantial amount by any measure.
We have no covenant risk. We have no debt due until 2019.
And furthermore, 75% of our debt is not due until 2030 or beyond. We will continue to prudently manage our balance sheet.
We have the financial flexibility withstand the current price environment for an extended period of time. Secondly, we are aggressively lowering our cost and capturing efficiencies across this organization.
Third, the quality of our asset base combined with our drive to be in the leading edge of technical innovation is delivering industry-leading operating results across all four of our core assets. Thanks for your time this morning and me and the team would be more than happy to answer any of your questions.
Operator
We will now begin the question-and-answer session and go to the first caller. The first question is from Benny Wong.
Please go ahead.
Benny Wong - Morgan Stanley & Co. LLC
Yeah. Good morning.
Just wondering if you can maybe talk a little bit about the expected 2016 exit rate or if not maybe give us a sense of trajectory into next year and maybe the profile of production over the course of this year.
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Benny. Thanks.
Thanks for the question. I think probably as you can imagine what is at February 24 that we're already talking about 2017.
We got a few months to go through the year. But our best estimate at the moment is, across our core four which is, as you know, what we focus on here, is from the fourth quarter of last year to the fourth quarter of this year, we'll probably see an approximate 10% decline.
Our operating teams are doing an incredible job, as Mike talked about, about continuing to drive capital efficiency and lower the cost. And I think as you've seen, we've had a substantial reduction in capital, but we've held on to the majority of our production to driving those efficiencies.
Benny Wong - Morgan Stanley & Co. LLC
Great. And any chance of maybe a per-play level sense of guidance production level in your – across your portfolio?
Douglas James Suttles - President, Chief Executive Officer & Director
We don't have that for today, Benny. I'll have Brendan and the team follow up with you later.
Benny Wong - Morgan Stanley & Co. LLC
Great. Thank you.
Douglas James Suttles - President, Chief Executive Officer & Director
You bet.
Operator
Thank you. The following question is from Greg Pardy.
Please go ahead.
Greg Pardy - RBC Dominion Securities, Inc.
Yeah. Thanks.
Good morning. Maybe this is a follow-up to that last question, Doug, the 10% decline on production.
So, is that pretty much evenly split between oil and liquids versus nat gas; like, i.e., is it 10% for both or would you expect a little more installation on the oil and liquids side?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Greg. It's kind of back to Benny's question on across the assets.
We haven't sort of yet given detail on each of the four. If you look across the year, what we're able to do, we obviously ended the year strong in all of those.
Just as with our original guidance, the majority of the capital is focused in the Permian and the Eagle Ford in the year. Because of the shifting environment, we do have more capital in the first half than in the second half of the year, which also gives us flexibility if the environment improves.
We can always hope.
Greg Pardy - RBC Dominion Securities, Inc.
Okay. Okay.
No problem. You mentioned just the alteration in terms of the vertical drilling program in the Permian.
But you also mentioned that you're working with the land owners. So, what does this mean in terms of land retention?
I.e., how much acreage would you actually lose as a consequence of this?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Greg. We're not losing any acreage here.
What our land team has been able to do with the mineral owners out there is work with them to modify the lease requirements and terms. In some cases, we've substituted horizontal wells for vertical wells.
In other cases, they just adjusted the time requirement and allowed us to push that back. So, what we've been able to do is take, what, just a couple of months ago we thought was going to be $150 million program to retain our land and convert it into a $50 million program.
That's a part of how we've improved our capital efficiency in 2016, but we're not losing acreage with this plan.
Greg Pardy - RBC Dominion Securities, Inc.
Okay. Perfect.
And maybe just to dig in a little bit on the capital side, how much carried capital then is embedded in the revised budget for the Montney and the Duvernay? Can you just remind me what the carried capital would have been at year end?
And if you don't have it at your fingertips, I can follow up.
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, we'll follow up on that. I'm kind of doing it by memory.
I think we had at year end somewhere around $600 million in the Montney and about $150 million in the Duvernay. The programs in both the Duvernay and the Montney are relatively limited.
A lot of the Montney capital in 2016 is actually in Alberta, which is not in the Mitsubishi JV, but those programs have been reduced.
Greg Pardy - RBC Dominion Securities, Inc.
Okay. And then last question for me then is, if you were to sell assets, further assets over the course of the year, does that extra dollar go into the bit?
Does it go into essentially cash on the balance sheet, or is it a little bit of both?
Douglas James Suttles - President, Chief Executive Officer & Director
Well, you know, Greg, other than the previously announced DJ sale, the plan really and the budget we've just talked about doesn't include asset divestitures. So, if you think – and clearly, we still have non-core assets.
We would – as I think forward, I'd be really disappointed and surprised if for the second year in a row, even in a very tough market, our net does not go down – our net debt does not go down. It's almost certainly going to go down this year.
Greg Pardy - RBC Dominion Securities, Inc.
Okay. Perfect.
Thanks very much.
Operator
Thank you. The following question is from Harry Majir (30:30).
Please go ahead.
Unknown Speaker
Hi. Good morning.
Just my first question, so you have some borrowings on your credit line, but the credit facility doesn't come due for a few years. And as you noted, you don't have another bond matured until 2019.
So, as you get the next round of asset sale proceeds in, are you considering using those to buy back some of your bonds in the market that are trading at a big discount to par, on the 41s (30:59) as low as $0.50 on the dollar, or are you still focused on paying down shorter-dated maturities?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Harry (31:08). I mean, if I just took a moment and kind of walk through the balance sheet here to address your question, I think Sherri tried to outline this and I think did a nice job.
Our credit facility of $4.5 billion was renewed last year through July of 2020, so a long time from now. We don't have any debt due to 2019, and most of our debt is due after 2030.
In addition, I should just maybe reconfirm that we have no work underway and no plans to issue equity. I know that some people have been speculating on this.
I would probably stress that, that seems to be raw speculation, but there are no plans underway at Encana to issue equity. And clearly, as we bring in proceeds from divestments, whether that's the DJ or others, we have a lot of flexibility.
We haven't made any announcements around how we would use that in regards to our debt structure, but we obviously have a lot of options there.
Unknown Speaker
Okay. So it sounds like that's – looking at some of that longer dated discount debt is certainly on the table.
Is that fair to say?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah. It's clearly an option on us.
We're all aware of how that's trading, and we – obviously, how that traded shifted off the Moody's announcement and (32:24) reminded everyone. S&P reconfirmed us at BBB as did DBRS; that's out there, but we're clearly watching how that debt is trading.
Unknown Speaker
Okay. Great.
And I guess on that last point, there's one other rating agency out there, at least one that counts your bond indices where you guys don't currently have a rating; that's Fitch. Can you just give us at sense, are you in discussions with them to potentially get a rating there to keep yourselves in the investment grade indices?
Is that something that's being talked about?
Douglas James Suttles - President, Chief Executive Officer & Director
I don't think it's probably appropriate to comment on that, but we're very aware that Fitch is one of the other rating agencies which plays an important role in rating on bonds.
Unknown Speaker
Okay. Fair enough.
Thanks.
Operator
Thank you. The following question is from Jeffrey Campbell.
Please go ahead.
Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.
Good morning. On slide 9, you described that Duvernay is increasingly material to production and cash flow.
Could you add some color on this comment and maybe how you see the Duvernay in relative terms in comparison to the rest of the portfolio going forward?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Jeff. I mean, I got to say Mike is a pretty modest guy because he blew right pass a pretty important number.
If you saw, he said D&C cost of $7.9 million. If we just back this tape up just a while, just a couple of years ago that number was $25 million.
Not too long ago we said we were aiming at $15 million, on our way to $12 million, and now we're sub-$8 million. When you look at that combined with 1.5 million barrel-ish type curves, condensate pricing that recedes in – if you actually look at our pricing, our realized price on crude in Canada is actually higher than in the United States, which is to show the value of condensate here.
You combine that with the benefits of the carry too, this is very attractive. And clearly, we've been watching and working with the Alberta government on the royalty structure because that's an important part of the returns.
We're encouraged by their recent announcement. There's still more detail to come.
And us and others in the industry are actively working with the government on that detail. But this is a competitive play.
As we mentioned late last fall, we had taken the decision to defer the next gas plant, which really controls the pace of growth. That decision in end of 2017, as we needed to see the results of the royalty review including the current environment where you're having to manage capital very closely.
But this is a competitive asset. Its returns compete with the other three assets in our portfolio.
Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.
Okay. Thank you.
Next thing I wanted to ask was just, in the Permian Basin, can you identify which zones are the major focus in 2016?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah. For the most of our work, we're focusing on the Lower Spraberry and Martin County, and we're focused on the Wolfcamp B in Midland County.
Mike mentioned we have – we pride ourselves on innovation and whether we invent it ourselves or copy it from others. And if you were in the Midland Basin today, south of Midland Texas, you would see an incredible sight, which is a drilling pad operated by Encana with four rigs drilling simultaneously as we speak, a 14-well pad, which we'll bring on in the second quarter of this year, which is focused in the Wolfcamp.
Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.
Okay. If I could ask one last one, this is a little bit of a higher-level question.
Doug, you mentioned that there's another 20% staffing reduction upcoming, and it looks like – you mentioned the average production is going to be down about 10%. I just wondered, do you feel that you have Encana rightsized going forward, or is there still another possible downsizing of the company to come?
Douglas James Suttles - President, Chief Executive Officer & Director
Jeff, first of all, I ought to say, and I know you guys know this, it's a tough time to be someone who works in the oil and gas industry. The job reduction is not only in Encana but across the industry have been as severe as I've ever seen in 33 years.
And this – I hope people have empathy. These are real people with lives and families.
Here at Encana, this will bring us to about 55% reduction from just over two years ago, and in my experience that's incredible. We actually not only look at how we can run our business as efficiently as possible, we benchmark ourselves.
We now believe our corporate G&A with this new budget, we'll probably be at least 10% better on a per BOE basis in our closest competitor of companies of similar size and scale. And in many cases, half the cost of our competitors.
This is something we focused in on. This reduction is part driven by driving more efficiencies and part driven by a significant reduction in capital.
We've cut our capital by more than 50% from last year and a lot of our people are actually tied to the deployment of capital program which is met, we've had to reduce it. I would say, we have done some what I think are creative things.
We're going to be deploying some of our staff in the field operations. We're going to be deploying some in the contractor roles and even service provider roles to maintain some of that talent because we do believe that we'll be spending more capital in the future than we are this year.
In addition, we're doing things like offering employee sabbaticals where we hope to be able to bring these people back once prices begin to recover at some point in the future.
Jeffrey Campbell - Tuohy Brothers Investment Research, Inc.
Thanks. That's a very detailed color.
I appreciate it.
Douglas James Suttles - President, Chief Executive Officer & Director
Thanks.
Operator
Thank you. The following question is from Jeoffrey Lambujon.
Please go ahead.
Jeoffrey Restituto Lambujon - Tudor, Pickering, Holt & Co. Securities, Inc.
Thanks. Good morning.
On the budget, can you talk more specifically about the moving pieces in terms of what criteria was used in setting it? Is there a targeted level of cash flow or spend at a certain commodity deck?
I know you've got the DJ Basin proceeds coming and you highlighted multiple times retaining balance sheet strength in the prepared remarks. So, is it more of a leveraged metric beyond the covenant you highlighted that we should think about?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Jeoff. I think we kind of indicated this, I think, even back in December.
So, first of all, I think Sherri stressed it pretty firmly that we've been paying attention to our balance sheet ever since the launch of our strategy. If you go back to these launch documents, it was one of the five core things we talked about back then.
And if you look at what we've done since the fall of 2013, we've continued to improve that. Obviously, price environment has deteriorated, and we intend to make sure we maintain the balance sheet and maintain that liquidity that we've strongly referred to on this call.
So that had a driving influence in here. Secondly, we're very, very focused on capital efficiency, production efficiency.
I think we've mentioned to a number of you that one of the changes in our comp structure issue this year is that is a target measure. It's got real visibility in the organization, and Mike and his team focused very strongly on this as we adjusted capital.
A good example of that is the Permian vertical program, which is a combination of our operating team and our land team have done a great job of improving. And then lastly, around capital efficiency, it really is focusing down to every individual dollar and how do you get the most in your bang for that dollar.
And in many cases, that means focusing on like drill-to-fill programs to avoid having to even build additional tank batteries in this environment. So it's kind of second order effects, because as we've talked before the return profile across our core four is very similar.
And we actually do generate a return in the kind of $35 to $50 deck as we've been talking about for some time.
Jeoffrey Restituto Lambujon - Tudor, Pickering, Holt & Co. Securities, Inc.
Great. Thanks.
And then last one for me, with respect to the savings on the CapEx and the OpEx sides, I know the operator and service company back and forth on pricing has been pretty heavy in the U.S. here throughout most the last year.
It sounds like it's picking up in Canada. So just curious to hear how do you characterize the environment in Canada today and how you see that shifting going forward if it's got more room to go from here?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah. What's interesting is, I think we mentioned all last year that we continue to test the market around pricing for services and we've been recently been out to the market again and seeing good reduction, surprisingly good reductions in Canada, but also in the United States.
That we – our colleagues in the service sector under tremendous pressure like we are as we all try to respond to this environment. And I can say they seem to be doing their part to try to get costs down to make sure we can maintain and return in this price environment.
The world taking on North America better be ready, because this part of the planet knows how to get it efficient and you're seeing it every day.
Jeoffrey Restituto Lambujon - Tudor, Pickering, Holt & Co. Securities, Inc.
Thank you.
Operator
Thank you. The following question is from Mike Dunn.
Please go ahead.
Michael P. Dunn - FirstEnergy Capital Corp.
Thanks. Good morning, everyone.
A couple of questions from me. The transportation and processing expense guidance has been reduced.
I don't believe you've talked about the specifics of why that's down versus your December guidance. I was wondering if that was maybe some new deals you've done in the Permian or if you could provide some specifics there?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Mike. Yeah, great work by Rene and her team on this.
A couple of things, one is we kind of highlighted in the comments earlier about the Haynesville and the flowthrough to that. The second thing just to mention here is our growth is in lower T&P areas, transportation and processing cost areas, so this is showing up.
The third thing to note is, we do have a considerable amount of transportation and processing cost in Canada and those are in Canadian dollars. So, they're benefiting from lower foreign exchange rate right now.
And then lastly, we're continuing to work aggressively to reduce our T&P cost. And you're just seeing the results of that flowthrough.
I mean, I think as a number of you have noted, our T&P costs are higher than our lifting costs and our operating costs. We're very much aware of that and we've been working very, very hard to bring those down and we'll continue to do so.
Michael P. Dunn - FirstEnergy Capital Corp.
Thanks, Doug. And second question, your four core plays exceeded that 270,000 BOE a day bogey.
The Montney was, I guess, well ahead of your guidance. The Permian was a bit behind.
Just wondering if you can talk to – it was a tower that was driving the Montney performance and maybe in the Permian whether that was weather or if you – what set you back there? Thanks.
Douglas James Suttles - President, Chief Executive Officer & Director
Yean, Mike, I'll make a couple of comments and ask Mike McAllister to jump in. I mean, part of what helped us in the Montney was the – I think Mike mentioned, is the TCPL restrictions, one being well managed by – between our operating and our marketing team doing a great job working together to minimize the impact of that.
And then secondly, those restrictions coming off late in the year. We have tremendous well performance out there, so being able to fully utilize that in our processing and compression capacity.
In the Permian, a couple of things just to note, we did have kind of all – every month of the three months of the fourth quarter had significant weather events in the Permian. In addition, you may have heard us and a number of operators seemed to have ended up with some bad casing, and we ended up with some casing problems on some new wells which delayed bringing those well on.
And then, lastly, we've talked about this a couple of times, these bigger completions we've been doing have actually slower ramp ups. They get to peak rate.
And Mike, what did I miss there?
Michael G. McAllister - Chief Operating Officer & Executive Vice President
I think you got it all there, Doug. Yeah.
The casing issue accounted for about a third of the shortfall in the Permian, That's something not just affected Encana. I think it affected a number of companies in the industry who ended – during cracking operations, we ended up with some stress cracking in up-hole.
That cause of that incident has been – that (45:13) failures, I should say, has been identified, and we put mitigating measures in place in terms of different steel, as well as changing our procedures. So we've got that fixed.
And the other two components, as Doug mentioned, in the Permian one was weather, and then the other was type curves basically taking longer to clean up than we had planned.
Michael P. Dunn - FirstEnergy Capital Corp.
Thanks, Mike. Thanks, Doug.
That's all for me.
Douglas James Suttles - President, Chief Executive Officer & Director
You bet.
Operator
Thank you. The following question is from Brian Singer.
Please go ahead.
Brian Singer - Goldman Sachs & Co.
Thank you. Good morning.
With regards to the minimal impact the reduced CapEx guidance is having on production, can you just talk to whether your well count is changing at all in your core areas and by area what you're seeing on the well productivity side? In another words, is this – well count is going down, the well productivity is offsetting that number, is it just a pure service cost deflation-type move in your CapEx guidance?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah. Hi, Brian.
Yeah. No.
Thanks for the question. A couple of thoughts and then hand over to Mike here to kind of fill in.
The first thing to note is our previous guidance didn't have any DJ in it, so what we got is approximately 20,000 BOEs a day for the first six months of the year. So that's offsetting some of the decline from the additional capital.
Then improvements in capital efficiency are actually driving – helping us recover from the rest of it, with a bit of improvement in our base operating performance. But the number of wells we're going to drill in all four plays is going down obviously with this amount of capital reduction as we go through the year versus our original plan
Michael G. McAllister - Chief Operating Officer & Executive Vice President
Yeah. That's right, Doug.
The well count is coming down. As we approach the way we looked at the budget and how we seriatim our decisions on a pad-by-pad basis, we really let basically the cash flow in first year, cash flow in the first two years really start driving our decisions which is really a capital efficiency seriatim item, if you will.
So, that drove how we ranked our wells, how we put our inventory together with respect to this year's program. And the wells are getting better as I've talked to you in terms of our well performance.
So, we're getting more efficient from a capital standpoint, improving type curves and really focusing our capital to be the most productive as possible.
Brian Singer - Goldman Sachs & Co.
Great. Thanks.
And apologies if this was asked earlier, but you mentioned I think just now, that some of these areas still are getting returns or acceptable returns in the $35 to $50 environment. At what price would you kind of go back to the level of activity that you were at previously here?
What – can you just give us some more color on the price point there?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Brian. As you know, this is really – this isn't an issue about returns because as we've talked about for quite a while now that we could not only generate a well return at that sort of price range, we can generate a corporate return as we're managing our corporate costs.
This is really about the balance sheet in this environment and being quite thoughtful and careful. Like others, I think I generally believe this price environment can't last that long.
The world won't have enough of our product. Right now, it's awash in it.
That will fix itself. But what we need to do is be thoughtful through this period because we actually don't – the thing we don't know is the timing.
We know the direction but we don't know the timing. As prices strengthen, our cash flow grows and then we can continue to invest more in the business.
That's kind of how we think about it right now. And, of course, I would emphasize one of the things, that at least according to our data indicates, is we probably have one of the best hedged positions in the industry now.
And we're strongly hedged which means we have minimal exposure to the kind of prices we're seeing on the board right now, which is important because that gives us the confidence to spend this level of capital and maintain the balance sheet. But there's not a precise price, but as price strengthens, it will allow us to expand our capital program and you'll probably see some linkage into how we protect that with our hedging program.
Brian Singer - Goldman Sachs & Co.
Thank you.
Operator
Thank you. The following question is from Mike Rimell.
Please go ahead.
Michael Rimell - UBS Securities Canada, Inc.
Hi. Good morning.
I'm just wondering if you can give me some color on the capital budget beyond 2016 that you think sort of would adequately support the four core plays? Like, I know 12 months ago, you talked about sort of a base level of capital spend – or sorry, six months ago, you talked about a base level of capital spending at $1.5 billion.
Obviously, that's come down a bit. How should we think about that going forward?
Douglas James Suttles - President, Chief Executive Officer & Director
Yeah, Mike. You know, it's – we're doing lots of work around this topic as everyone is and considering lots of options and alternatives.
But when you look out in time, if you think this year at $1 billion 4Q to 4Q, we're going to see about a 10% decline in our core four. That sort of gives you some indication that to maintain or grow, that's going to take a bit more capital than that.
But as Mike indicated, the cost per well continues to go down and our well performance continues to improve. So, it's a little hard to predict.
I think it's more than $1 billion. I mean, when we look out in time, it's hard for – it kind of goes back to the organization question.
It's difficult for me to believe if you think out – if you look out two to five years, that we're not spending more than this. And we're back to growing what is, in my view, one of the best portfolios in North America, but putting a precise number is a bit early.
But it would be bigger than the number we're talking about for 2016.
Michael Rimell - UBS Securities Canada, Inc.
Great. Thanks.
And then, sorry, just one follow-up. In the Montney, as we look at your growth lines there, I mean, how much flexibility is in there, like how much are you tied to spend there?
Douglas James Suttles - President, Chief Executive Officer & Director
We have two pieces at Montney, as you're aware. In British Columbia, we have our partnership with Mitsubishi and Cutbank Ridge, and we have a rolling five- year play in process with them which we work on and agree every year.
We're largely on the plan we've agreed with them for quite some time. This year was basically a drill-to-fill program because our next expansion of compression capacity in Cutbank Ridge doesn't come on until 2017, the back end of next year.
And in Alberta, which we've had – I think as we've talked about before, we've had some really exciting results in the Montney, but we are capacity-constrained there. We've been assessing that and monitoring the royalty review to decide what we do with that going forward.
But in the short term, in 2016, relatively limited additional – potentially some, but not a lot, largely because of processing and compression constraints and some of that coming off next year.
Michael Rimell - UBS Securities Canada, Inc.
Great. Thanks very much.
Operator
Thank you. The following question is from Jon Wolff.
Please go ahead.
Jonathan D. Wolff - Jefferies LLC
Hello.
Douglas James Suttles - President, Chief Executive Officer & Director
Hi, Jon.
Jonathan D. Wolff - Jefferies LLC
Good morning. How are you?
Douglas James Suttles - President, Chief Executive Officer & Director
Good.
Jonathan D. Wolff - Jefferies LLC
Thanks for the thorough update. A few follow-ons; one on the amount of sand proppant you're using.
There was a – you talked about how gradual it was and maybe here in Canada in the past in terms of figuring out plays and you've gone from sort of, I don't know, 1,000 pounds per foot of stimulation, horizontal stimulation, to as much as 4,000 pounds and back off to 2,000 pounds and then you – wondering if you have any more information in terms of what the right number is and if that – if it makes a difference to what price environment we're in to calculate that?
Douglas James Suttles - President, Chief Executive Officer & Director
You know, Jon, I'm going to let Mike handle most of the question because the CEO response is were using a lot, but a little less than we used to.
Jonathan D. Wolff - Jefferies LLC
Okay.
Douglas James Suttles - President, Chief Executive Officer & Director
I know that is – but let me let Mike help you out here.
Michael G. McAllister - Chief Operating Officer & Executive Vice President
Hi there, Jon.
Jonathan D. Wolff - Jefferies LLC
Hi.
Michael G. McAllister - Chief Operating Officer & Executive Vice President
Yeah, I mean, obviously our sand trials and our optimal sand concentrations is varying play by play as well as zone by zone. So we're still a work in progress to a certain extent.
If I kind of talk to, talk to the Montney, we've been tested from 1,000 to up to 2,000. That's still under evaluation.
What I'm thinking in the Permian, again, I think we tested up to 4,000, but I sort of think about this year we're probably going to be anywhere between 1,000 to 2,500 pounds per foot. Again, that's going to vary county by county and also zone by zone as we learn more here.
So still, still work underway. In the Eagle Ford, we're in that somewhere anywhere between 1,500 to 2,000 pounds per foot.
Again, it's still worth, we're looking at optimizing in. As you move to the maturity window, sort of from the condensate to the oil window, that's going to vary as well.
So, I mean, there's a lot of science still going on, a lot of learning still going on, but we kind of gave you sort of the range of what we're thinking about right now in the different play areas.
Jonathan D. Wolff - Jefferies LLC
Okay. And in terms of...
Douglas James Suttles - President, Chief Executive Officer & Director
The other thing – the only thing I'd add to Mike's comment, there is a – because you kind of point it at the right thing. There is a relationship between the commodity price and how big the completion should be.
And we actually did a great deal with testing last year, understanding – and trying to understand the linkage between not only rate, but ultimate recovery from the wells and completion size. But clearly in lower prices, that tradeoff backs down some.
And on average, we're probably going to be slightly smaller jobs this year than we did last year because of that.
Jonathan D. Wolff - Jefferies LLC
That's helpful. You don't talk that much about Howard County, some others have.
You obviously have a big position up there. Is there still active leasing going on?
You want to tell us a little more about Howard?
Douglas James Suttles - President, Chief Executive Officer & Director
Well, I think what I'd say is, first of all, I would probably never comment on what we're doing on acreage because it's an incredible and competitive place. We have had some – like others, some really good results in Howard County, and particularly more recently in the Wolfcamp A.
We are focusing – I think that we have previous question on this. This year, it's more in Midland and Martin.
But there's nothing wrong with Howard. I can tell you that.
We've had some of our best well results in the Wolfcamp A and Howard County.
Jonathan D. Wolff - Jefferies LLC
Got it. Very helpful.
Thanks.
Operator
Thank you. At this time, we have completed the question-and-answer session, and we'll turn the call back to Mr.
McCracken.
Brendan McCracken - Vice President, Investor Relations
Thank you, ladies and gentlemen. This now concludes our call.
Operator
Thank you. The conference has now ended.
Please disconnect your lines at this time. We thank you for your participation.