Encana Corp. cut more jobs and booked a major writedown on the value of its oil and natural gas reserves, as the sharp drop in commodity prices begins to eat away at the energy industry's foundations.
Calgary-based Encana's second-quarter loss swelled to $1.6-billion (U.S.) from a $271-million profit last year mostly on a non-cash $1.3-billion after-tax impairment attributed to the company's U.S. operations.
An additional 200 jobs were eliminated in the past month, the company confirmed on Friday, bringing to 1,400 the total number of layoffs since Doug Suttles took over as chief executive officer more than two years ago. The shares tumbled nearly 9 per cent to close at $10.26 (Canadian) on the Toronto Stock Exchange.
The moves are the latest signs of distress in an industry struggling to adjust to dramatically lower crude prices.
Energy companies have already shed thousands of jobs and pared spending levels sharply to cope with oil's swoon to less than $50 (U.S.) a barrel from more than $100 last year.
Now, weak prices are eroding the overall value of oil and gas reserves they hold in the ground, reducing companies' worth as more deposits are rendered uneconomic.
Encana said it has recorded $2.6-billion in after-tax impairments this year after testing its reserves against lower prices. Last year, the company spent about $9-billion on acquisitions, primarily in U.S. shale-oil plays. On Friday, its entire market capitalization stood at roughly $6.6-billion.
"You had a period of M&A when oil prices were almost double where they are now. That leaves the door wide open to write down those assets," said Robert Mark, associate director of research at MacDougall, MacDougall & MacTier Inc. in Toronto.
"At the end of the year, unless things really turn around fast, you're going to see massive reserve writedowns and massive reserve impairments, absolutely."
U.S. West Texas Intermediate oil has retreated into the $40s after cresting at $60 a barrel in late June, raising the prospect of additional layoffs and project delays in an industry already in contraction mode.
Some of the industry's largest companies, including Suncor Energy Inc., Royal Dutch Shell PLC and Chevron Corp., have reduced head counts and put off billions in investment as demand for cheap crude fails to offset soaring supplies. That has kept pressure on WTI oil, which closed Friday at $47.96 a barrel.
"It's clearly trying to find its feet," Mr. Suttles told reporters. "The real question is: Does it work itself out over six months or does it take a couple of years? And I don't know the answer to that."
Encana under Mr. Suttles has jettisoned assets and narrowed its focus to a handful of producing zones as part of a broader shift away from natural gas to oil.
In the quarter, production of natural gas liquids jumped 87 per cent from levels a year ago, to 127,300 barrels a day.
Cash flow, an indication of the company's ability to fund future development, fell to $181-million from $656-million a year ago.
Despite soggy prices, the company expects to pump about 270,000 barrels of oil equivalent per day, or 65 per cent of total production, from four main shale zones by year-end.
Currently, 57 per cent of its output comes from the Permian and Eagle Ford regions in Texas, as well as Alberta's Duvernay Formation and the Montney in B.C. – where the company has reduced activity to a standstill.
In the quarter, Encana said natural gas production fell 38 per cent from a year ago, to roughly 1.56 billion cubic feet a day. Production was down 16 per cent from the previous quarter in part because of outages on TransCanada Corp.'s B.C. gas system, the company said.
Encana has so far spent about $1.5-billion of its targeted $2-billion budget, with roughly two-thirds earmarked for Texas shale plays.