Earnings Call: Q3 2018

Nov 1, 2018

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Encana Corporation's Third Quarter 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. Members of the investment community will have the opportunity to ask questions and can join the queue at any time by pressing star 1. For members of the media attending in a listen only mode today, you may quote statements made by any of the Encana representatives. However, members of the media who wish to quote others who are speaking on this call today, we advise you to contact those individuals directly to obtain their consent. 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 Corey Code, Vice President of Investor Relations. Please go ahead, Mr. Code. Thank you, operator, and welcome, everyone, to our conference call to discuss our strategic combination with Newfield and our 3rd quarter results. This call is being webcast and the slides are available on our website at encanada.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 annual report 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 mean U. S. Dollars and the reserves, resources and production information are after royalties unless otherwise noted. I will now turn the call over to Doug Suttles, Encana's President and CEO, to explain why we think this is such a great transaction for Encana. We'll then open the call up for Q and As. Thanks, Corey. We are excited to talk to you today about the strategic combination between Encana and Newfield. This transaction creates a leading North American unconventional company. It is consistent with our multi basin strategy, focused on the best parts of the best basins and is accretive to our plan. The STACK Scoop adds a third material high quality asset to our complement of high quality positions in the Permian and the Montney. Our confidence in the combined entity enables us to commit to an increased return of capital to shareholders. Post closing, we plan to increase our dividend by 25% and upsize our share buyback from $400,000,000 to $1,500,000,000 for 2019. The combination of Encana's and Newfields assets creates America's North America's number 2 largest unconventional company. On a combined basis, we see significant opportunities for efficiencies and synergies. We expect to apply our multi basin model, deploying rapid learning and innovation to further drive efficiencies in the STACK and SCOOP. The strong liquids production from Newfield further builds on our focus to grow liquids. Our balance sheet gets even stronger and our increased scale will benefit all of our assets and our corporate returns. Over the past 5 years since our strategy launch, we have transformed in Canada to a company focused on generating quality returns. Last year, we outlined a compelling 5 year plan that showed considerable cash flow growth, improved returns and balance sheet strength. This transaction is consistent with our multi basin strategy and accretive to that plan. Following the close of this transaction, we plan to accelerate return of capital to shareholders through an expanded buyback program of 1,500,000,000 as well as the 25% increase to our dividend. The combined company improves our multi basin advantage. Being a multi basin company means that we have flexible and dynamic capital allocation, rapid learning transfer across our plays and continuous innovation and improvement. Our cube approach looks to maximize the value of our acreage, and we are excited to deploy these learnings in the STACK and SCOOP. We are confident we can generate significant improvements in cycle time, reduce cost and improve resource recovery through advanced completions, just like we have accomplished in our other assets. This combination unlocks clear and achievable synergies in both G and A cost and through cube development at scale. The balance sheet becomes bigger and remains strong. This transaction is accretive to our 5 year plan and enhances our liquids mix. We know that being in the best rocks is critical to long term success and this philosophy is one of the core elements of our strategy. A third party evaluation of half cycle breakevens demonstrates the low cost and competitive nature of our plays. The STACK scoop clearly competes with the other assets in Encana's portfolio with half cycle breakevens in the mid- to high $30 range. Today's announcement further supports our strategy of positioning ourselves in the core of North America's premier unconventional plays. Approximately 80% of our combined production will come from some of the best large scale low cost basins, the Permian, STACK SCOOP and Montney. Our large contiguous acreage positions in each of these basins allows us to apply the cube to develop efficiently at scale. The STACK SCOOP is a world class resource. The new field position contains an estimated 3,000,000,000 barrels of oil equivalent of net unrisk resource in place. This large contiguous acreage position in the STACK scoop encompasses the best parts of the play. The new field position includes approximately 360,000 net acres and 6,000 gross risk locations. In the Q3, production from the asset was 144,000 barrels of oil equivalent per day and 60% of that production was high value liquids. In the STACK, the acreage is focused in the southwest part of Kingfisher County. We view this as the sweet spot of the play as it combines some of the thickest, highest quality reservoir with the high value fluids in the oil window. To this point, development in the STACK has been primarily focused on 1 and 2 well pads for delineation and land retention. The play is in the early innings of full field development with only a handful of pilots testing full scale spacing and stacking configurations. This is where Encana's expertise with the cube will add value by delivering commercial full field development at scale. The STACKSCOOP lends itself to cube development. The reservoir is thick and laterally extensive. With reservoir thickness up to 6 50 feet in the core of the STACK, we see at least 2 to 4 target benches across the position. The majority of the lands are in the high value oil window. In the STACK, the Meramec is the primary target with additional STACK potential in the underlying can of Woodford. In the SCOOP, the Woodford shale is the primary target with additional upside in the Springer. The reservoir is over pressured, which enhances well productivity. In the core of the play, we see initial well rates of 1,000 to 3000 barrels a day. This strong deliverability competes with the best wells in North America. The combination of the Encana and Newfield positions delivers immediate scale by creating the 2nd largest producer of unconventional resources in North America. The multi basin portfolio provides a powerful competitive advantage, helping to manage risk, providing optionality to direct our capital to the highest margin opportunities and transfer learnings across the business. With this transaction, growth at Encana will be anchored by large premium positions in the oil and liquids weighted Permian, Stack SCOOP and Montney. The Eagle Ford, Williston and Duvernay will further support value by generating significant free operating cash flow. Our cube development approach is the next phase of commercial development in the STACK SCOOP. We have established a track record of deploying cube development to enhance efficiencies, reduce cycle times and improve well returns. Our larger pad sizes and deployment of multiple drilling rigs and multiple completion crews keep cycle time short and delivers economy of scale that reduce per well cost. Through our integrated supply chain strategy, we work to optimize the supply chain, self sourcing sand, water and chemicals. Combining this with our relentless focus on efficiency, we expect to capture significant savings of approximately $1,000,000 per well or $125,000,000 per year. At Encana, we are proud of our culture of innovation that we have throughout our organization. Across our plays, we have consistently demonstrated improving operating performance. When we entered the Permian in 2014, drill times were approximately 25 days per well. Today, we drill considerably longer laterals in about 12 days. This improvement didn't happen by accident. Across our operations, we are continually testing and adopting new technologies, sharing learnings across our multi basin portfolio and using a data driven approach to optimize everything from drilling parameters to compressor set points to reservoir targeting. We intend to bring the same technical rigor and culture of innovation to drive performance in the STACK. Over the last 2 years, our asset teams have been working to optimize our completion designs. Across all of our plays, we have seen repeatable success by pumping fine grain proppants in clean fluids with tight cluster spacing. We believe this combination keeps frac energy close to the wellbore where it generates the most complex fracture networks. This has resulted in significant production uplift across our portfolio. We expect the application of advanced completions in the STACK Scoop will add further upside to the play. We expect about 30 30% of the improvement will come from reduced cycle times through improved drilling performance, fewer rig moves and the application of our sophisticated planning and logistics processes. An additional 30% of the savings will stem from the efficiencies associated with multi well pad drilling. Shared services, economy of scale and the rapid transfer of learnings will drive these improvements. We see further opportunities to reduce well costs through our supply chain management team. Our self sourced commodities including sand, water, chemicals and innovative arrangements with our service providers will help to drive another 20% reduction in cost. Finally, the upside associated with advanced completions will add an additional 10% efficiency. Beyond the synergies associated with cube development, we expect to capture an additional $125,000,000 of efficiencies to reduce G and A. In total, we expect this transaction to deliver about $250,000,000 of annual synergies, a compelling $1,000,000,000 in savings over the next 4 years. We intend to hit our projected run rate synergies in the second half of twenty nineteen. We are confident in our ability to deliver these synergies. I'll now turn the call over to Sherri, who will briefly touch on the debt and credit implications of this transaction. Thank you, Doug. The transaction is credit positive with additional scale and production and reserve and is aligned with our leverage target. We expect that our leverage will continue to be on track with mid cycle leverage targets as we expect our net debt to adjusted EBITDA to be at approximately 1.5 times at year end 2019. The increase in our planned return of capital to shareholders today is a strong message about our commitment to shareholder returns, disciplined capital allocation and the confidence in the combined business. We are expecting that this additional dividend and share buyback will be completed with cash on hand as well as ongoing free cash flow from a strong business. Maintaining a strong balance sheet and favorable liquidity position enable us to weather price volatility and deliver competitive corporate returns across the business cycle. Our pro form a debt has a well dispersed maturity profile that has a weighted average term of about 10 years. We will also continue to have significant liquidity with access to 4,000,000,000 on our existing undrawn credit facilities. I'll turn the call back to Doug. Thanks, Sherry. This acquisition aligns with Encana's core competencies in resource identification, operational excellence, capital allocation and market fundamentals. We believe these core competencies are what gives us a competitive advantage and they will enable us to maximize the value of the acquired assets. We believe there is real value in having a focused multi basin portfolio. Having multiple core positions gives us a tremendous advantage when it comes to managing risks related to market access and infrastructure. It gives us enormous flexibility and the opportunity to redirect capital as required. Innovative quickly innovating quickly and scale success across multiple plays. We have established a strong track record as an operator who excels in execution at scale. Our cube development approach and advanced completion designs bring together learnings from across our diverse asset base and will add significant value to development of this fantastic asset base. I often talk about the importance of being in the best rocks and how important this is to sustainable success. This acquisition is the direct outcome of our detailed technical analysis of the Anadarko Basin and our belief that the acreage assembled by the Newfield team is in the very heart of this prolific oil play. The great thing about being in the core of the best plays is that they improve over time. We expect the same outcome from the STACK and the SCOOP. Our focus on market fundamentals enables us to maximize our realized prices, enhance our margins and manage market risk. Our view of market fundamentals informed and supported our decision to enter the Anadarko Basin. Its close proximity to liquids markets hubs contributes to higher netbacks and reduces market risk. While today is an exciting day to discuss the transaction with Newfield, we also want to point out just how well our underlying business is performing, both operationally and financially. We are executing on our 2018 plan, delivering efficient growth, strong financial results and growing oil and condensate production through the second half of the year. Our Q3 performance builds on our track record of consistent delivery. We expect to deliver approximately 30% year over year growth and generate free cash flow in 2018, 1 year earlier than planned. Our cash flow continues to grow through a combination of increased liquids mix, our focus on driving efficiency and our approach to maximizing realized prices. This means that higher commodity prices translate into higher margins, not higher cost. At $16.93 per BOE, our Q3 cash flow margin was up over 60% compared to the same period 1 year ago. We are an operator that excels at execution at scale. Our liquids volumes grew an impressive 15% in the quarter and are continuing to grow in the Q4. Our cube development approach is yielding strong results in the Permian, where production was 99,000 barrels per day in the Q3 and is on track to average over 100,000 barrels a day in the Q4. We are also very pleased with our cubes in the Montney where liquids production grew 23% during the quarter and remains on track to average between 55,000 65,000 barrels a day in the 4th quarter. We are currently producing about 55,000 barrels a day of liquids in the Montney. The Pipestone liquids hub came on late in Q3 ahead of schedule providing further confidence in our ability to deliver on Q4 targets. Our marketing strategy continues to enhance our margins. Once again, the realized prices we received in the Q3 for our Permian oil and Canadian gas volumes were well in excess of the respective benchmark prices. The combination of firm physical transport and financial basis hedging gives us confidence in our ability to achieve our growth plans while maximizing our margins. Across the portfolio, we are seeing the benefits of scale and our relentless focus on efficiency. Our 3rd quarter per unit LOE and T and P expenses were both down significantly. We are carrying significant momentum into the end of the year as we continue to grow liquids volumes and generate free cash flow. I'll now turn the call back over to Sherri, who will discuss our financial results. Thanks, Doug. We are very pleased with our results year to date. Our disciplined focus on growing high value liquids production, maximizing realized prices and driving efficiencies continues to expand our margins. At the time of our Q2 conference call, we increased our full year 2018 cash flow margin to $16 per BOE, up from our previous target of $14 per BOE. Our cash flow margin was $16.93 per BOE in Q3, giving us a high degree of confidence that we can deliver on that target. As Doug mentioned, we generated $66,000,000 in free cash flow in the 3rd quarter and expect to generate additional free cash flow in the 4th quarter. With the strong performance that we've seen across the entire portfolio, we expect that each core asset will be free operating cash flow positive for the year. Our balance sheet also remains in great shape. Our leverage ratio fell to 1.6 times at the end of the quarter. With the expected closing of our San Juan disposition by the end of the Q4, we now expect to come in below our target of 1.5 times net debt to adjusted EBITDA by year end. Solid operational performance across the portfolio and an increasingly oil and condensate focused development program drove a 15% increase in liquids production this quarter. More than 75% of our liquids production was higher value oil and condensate. Our total company liquids mix also continues to improve. In the Q3, liquids accounted for 47% of total production. Our relentless focus on efficiency and greater scale is driving our per unit costs down. Compared to last quarter, our per unit operating costs and our TMP costs were down 10% and 9%, respectively. All of this contributes to margin expansion and cash flow growth. We issued an update to our 2018 guidance this morning with a couple of minor adjustments. We now expect our full year transportation and processing costs to be about $25,000,000 lower than our original guidance. As a result, we are lowering our TMP guidance range to $7.20 to $7.40 per BOE. Operating and administrative costs are expected to fall within their respective guidance ranges. We are forecasting full year capital of $2,000,000,000 This reflects $55,000,000 of capital associated with divested assets, the San Juan and the Pipestone Liquids Hub. This capital will be recovered as divestiture proceeds. It also reflects higher diesel costs, steel tariffs and delays in local sand delivery in the Eagle Ford, which have been resolved. We remain confident in our ability to achieve our 2018 plan and we expect to finish the year strong, positioning us well for 2019. I'll now turn the call back to Doug. Thanks, Sherry. We have completed a very strong Q3 and we're well positioned to deliver on our 2018 objectives. Our 3Q results may be overshadowed by today's exciting announcement, but they should not be overlooked. This transaction is consistent with our strategy of being in the best rocks and the best basins, our focus on growing liquids and increasing return of capital to shareholders. Thanks for joining us on the call, and we'd now be happy to take your questions. Your first question comes from Greg Pardy with RBC Capital Markets. Your line is open. Thanks. Good morning. Doug, what's the plan for the balance of the new field portfolio outside of the STACK Scoop? Yes. Hi, Greg. I think the thing hopefully everyone recognizes and acknowledges is that we've always had a very focused approach to portfolio. Clearly, what we have now with this combination with Newfield is large contiguous positions in 3 of the best plays in North America. As I mentioned on the call, if you think about the Duvernay, the Williston and the Eagle Ford, these are high quality plays. They're free cash generating assets. But the growth in the business is clearly going to be focused in those core three plays. Okay. So when you think about those and I don't want to push you too far here, but I mean in the past you've looked to dispose of stuff that was non core if you could or as you say, you run them for free cash. I'm assuming both options are open on the balance. Yes, Greg. Yes, I think we never like to comment on the future of the portfolio other than just say I think the direction is always very clear. We're very focused and disciplined about capital allocation. And even though those other three assets are very high quality, they are in the core of the core of those basins. Obviously, they have much more limited scale, where the places we have real scale are the Permian, the STACK SCOOP and the Montney. Okay, perfect. And just a follow-up for me is, the question is coming up from clients this morning. As opposed to getting into a new play, why not have extended your footprint in the Permian kind of in areas that you're already concentrated and know well? Yes. A couple of things just to say there, Greg, and it's an expected question, is that we have this belief that you have to be in the right rocks. And not only that, you have to be in the best parts of the right rocks. So when we constantly look at North America, we've been studying this basin for over 5 years. We've been watching it carefully. We think it's great value. We think it's absolutely right for the way we approach development. But we're also multi basin, but we also say it's limited number of plays. We don't want to be in 1 or 2. We want to be in a limited number. We think this fits with this. I mean, the STACK SCOOP, I think, has got tremendous opportunity here. You're up to 150,000,000 barrels per section of hydrocarbons. It's oil. I mean, the Newfield team, which has got this great track record dating all the way back to Joe Foster, has assembled an incredible acreage position in the oil window and it's over pressured. So we think this is absolutely ripe for what we've learned in developing across the place. And as a reminder, all we do is unconventionals. That's all this company does. We think we're good at it. We think we're good at identifying the right rocks and knowing how to develop those and knowing how to actually market the products well. Perfect. Thanks, Doug. Your next question comes from Randy Olinberger with BMO Capital Markets. Your line is open. Hi, Doug. Just building a little bit on Greg's questions, I guess, and this is just kind of around how we think about capital allocation going forward here. Do you see the SCOOPSTACK is representing the most potential upside and so we should think about you sort of steering your capital towards that play in the short term and maybe spending a little bit less in the Montney and some of the other plays? Yes, Randy, it's just a bit early to talk about the exact distribution of the capital across the assets. So and just on that, we would expect to guide to 2019 in conjunction with closing, which we expect to be in the Q1. We're going to be working that hard and obviously working to optimize that budget for next year. But I'd say a few things. Number 1 is, this business will generate free cash in 2019. Number 2 is, as we've demonstrated today, we are going to return additional capital to shareholders. We obviously have had a dividend for quite a long time. This year we've been buying shares back and we've expanded the dividend and the buyback program But we do think it will compete for a large amount of capital. We think the 3 plays will obviously be the biggest piece. But as a reminder, we're getting through the period of big growth in the Montney. We've been filling up those facilities. We've built and partner with people like Verison and Keyuron, which means that, that capital will be more leveling out, I expect, as we go to 2019. And also the carry we have with Mitsubishi actually rolls off next year as well, which will affect that profile. But we'll come back to this, but I expect it to receive a reasonable amount of capital next year. And just one last one again kind of building on the discussion. So I know you're not going to talk about potential dispositions, but we still have the criteria whereby if you really can't see a pathway to getting to 50,000 BOEs a day, it sort of falls into the disposition candidate bucket? Yes. Greg, we've always been clear about this that it doesn't make sense for us to focus growth in an asset that can achieve at least 1,000 barrels a day. We don't think they can actually create the benefits that we get with the things we do with development. So that obviously plays into our thinking. I'd just highlight though, if you look at our Eagle Ford asset, it's about 50,000 barrels a day, been there for a while, gotten better every single year and generates free cash. So that's one of the ways we think about these. We clearly every asset has to generate significant value and the areas that don't have the same growth need to be mainly focused on free cash generation. Thanks, Doug. Your next question comes from Brian Singer with Goldman Sachs. Your line is open. Thank you. Good morning. Good morning, Brian. Can you talk to the importance of this deal specifically to what you're doing on the dividend and share repurchase side? Arguably, legacy assets were going to be driving a step up in free cash flow that could have sourced some, if not all, but maybe that's what I want to do to comment on a little bit. Yes, Brian. I think a couple of things. One is, we are in a business, a commodity business. It has volatility in the prices of our products. And I think what we demonstrated in this year in 2018, that return of capital was part of our program. And of course, we committed to the $400,000,000 buyback program this year. As we look out to next year, with this combination with Newfield, we have a lot of confidence of how this business will perform, which gave us the confidence to come out now and expand that buyback program up to $1,500,000,000 and expand the dividend. But we think we have to do that because we are a commodity business. We think we have to look at that every single year and just see how the in particular the commodity is performing. But we do believe we have built a business which had modest commodity prices, generates free cash and has growth. Great. Thanks. And then my follow-up is on the new field assets and then your strategy with them. We've gotten questions from investors over the years on just the pace of Newfields Anadarko Basin oil growth relative to the CapEx invested. And obviously, oil is not the only source in a cash flow stream, but how important is accelerating Anadarko Basin oil growth to the overall value proposition for Encana? And if we think about your value add from integrating cube strategies, etcetera, to what degree will that $250,000,000 in synergy number be driven by revenue growth from a differentiated oil mix, just more BOE a day or the same CapEx or lower CapEx and operating costs via cost efficiencies? Yes, Brian. I think the Newfield team, people should acknowledge what they've done. They've created what we think is the premier position in the basin. They've had a very appraising the play and also retaining land, which I think has been what's driven their program in the last couple of years. And I think it was it's just ready to, if you will, take off into the development mode, which makes it ripe, I think, for many of the things we do in our other plays. When we talk about synergies, we're actually those are just upsides to the things you mentioned to what we see here. I mean, the G and A piece is very clear. We tried to outline that in one of the slides. And then on the capital water, some of the things we do with multi water, some of the things we do with multi rig, multi frac spreads on large pads. We think we can improve cost by about $1,000,000 a well and get at that in 2019. Further upsides are going to come from other benefits from that. But those two things we think are very clear. We have line of sight to. We'll be working on at day 1, which helps with the free cash generation of the business. And of course, as we prove that to be true, that will also feature into the conversation about how we allocate capital. Great. Thank you. Next question comes from Josh Silverstein with Wolfe Research. Your line is open. Hey, Josh, we can't hear you. Josh, your line is open. Hey, guys. Good morning. Sorry about that. One of the keys to Newfield for us was them hitting the inflection point in oil growth. Just following up on the previous question, It seemed like per Newfield that was slated to come in the Q2 or Q3 of 2019. I just wanted to see if that's what you guys were still seeing based on their move towards large scale development? Well, I think it is set to take off in 2019. Exactly what quarter, a little early to that. But I think we agree with them that this thing is ready now to go into large scale development mode and to get the efficiencies from that. Also, we see opportunities here with some of the things we've learned around completion design and other plays and we believe we can apply those which could create additional upside here. But it looks like 2019 is the takeoff point exactly which quarter we'll have to obviously work through as we work through our budget process with them. And they were clearly going much more heavily towards the STACK development play relative to elsewhere in the basin? Is that how you guys think your capital allocated will be too? Well, if you look at their acreage footprint, the place that it's most significant is in that Southwest Kingfisher County area, which is really the heart of the over pressured oil window in the STACK. So that makes a lot of sense. So there is quality acreage elsewhere down in the SCOOP and then they have positions even in the Northwest Extension. But the really core of it is in Southwest Kingfisher County as well. So that feels like the place that's ripe for development today. Got it. And then just going back on the other opportunities that were in front of you guys, how different was this deal versus a Midland transaction that might have been done at 30,000 or 40,000 per net acre or acre? It's something that may have spit off cash flow free cash flow a year or 2 from now. Were there other opportunities available like that because it seems like there are packages in the Midland Basin relative to the San Marco transaction? Well, Josh, one thing we've said continuously is we've intended to build a company that can generate quality returns at the corporate level through the cycle. We've also said that anything and everything we do needs to be accretive to our 5 year plan and the core measure in that 5 year plan is cash flow per share. We think that fits that. We think this is at the right stage. I would point out when we entered the Midland Basin, it was at the very, very early days of moving to horizontal development. When we entered with Athlon, I think there were 17 wells, horizontal wells drilled at that point. It was somewhere around 28,000 barrels a day as we talked to just today, we're at 100 now. And it was ripe for taking off into real large scale growth. We think the STACK and the SCOOP are at exactly that same point in time today. Great. Thanks guys. Next question comes from Dennis Fong with Canaccord Genuity. Your line is open. Good morning, guys. Good morning. And just quickly here, in the past, you've kind of indicated that your belief of kind of 4 to 7 core assets is being kind of the right number of kind of optionality within the context of a portfolio. Not specifically around kind of asset dispositions, but given that you're at 3 right now of what I would maybe characterize as core assets that you are willing to allocate a significant amount of capital towards. How should I think about even the other plays you currently have, which are, I guess, less or attracting less capital on a net basis? Yes, Dennis. I think as we mentioned that and a couple of people have already highlighted on the call that we think that what we're good at is identifying high quality resource and then developing it at scale. So that's what plays into this. We also believe strongly that the best approach is multi basin. But we also believe it has to be focused, so it can't be too many because one of the things we pride ourselves on is our cost structure. We keep it low. We think it's tied back to strategy and focus. So if you look at this, we now have we had 2 assets with real scale and running room in them and growth potential in the Permian and the Montney. This gives us a third one. We have 3 very high quality, but obviously, assets with less running room and growth potential in them. And with this combination, that's actually the Duvernay, the Williston and the Eagle Ford. And what we'd say is today those assets will be focused on free cash generation, continue to drive performance, drill better wells optimization. And that's how we think about the business. But clearly, the land positions in all three of those don't have the same growth potential that the other 3 do. Okay. Perfect. And then just kind of carrying on from that, just in terms of from a pro form a entity prior to Encana was planning to show quite, we'll call it robust production growth over their over your 5 year plan and starting to introduce essentially free cash flow towards the end or a very large component of free cash flow towards the end of the 5 year plan. How does this transaction going to change, we'll call it your perception of that, as well as the potential rollout of the split between returning free cash to the shareholders and showcasing kind of more immediate production growth on an organic basis kind of after this nomination? Yes. So I think what the announcement today, we shouldn't overlook the expanding the buyback to $1,500,000,000 and increasing the dividend by 25%. So this now is buybacks going for the 2 years in a row and expansion of the dividend, which is a real return of capital to shareholders, which is part of our plan. We also said that anything we would do, whether that's deploy additional capital in the business or a transaction like this had to be accretive. And I've already talked about cash flow per share. We also believe it's accretive to free cash generation. Clearly, we're going to work through the details of that, but we have enough confidence today to do that to make this significant expansion of the buyback program and the increase to the dividend. Okay. Thanks. Your next question comes from Jeffrey Campbell with Tuohy Brothers. Your line is open. Good morning and congratulations on the acquisition. I'd like to just ask one question related to the STACK Scoop, then I'll be a contrarian and ask something about ongoing operations. When you take over, once the deal closes, are you going to concentrate immediately on cube development or is there going to sort of be an interim period where you get your arms around Newfields ongoing projects first? Yes, Jeff. I think through the due diligence process with the Newfield team, we think and I think they were just about to do the same thing that they've done a lot of work on appraisal, a lot of work on land retention. I think they should be complimented. They did it in a very smart way. And it was ready for development at scale. They've discussed this as a row development concept, which isn't a huge difference from how we approach it with the cube. So we think it's ready for that stage. They've done a lot of work. We've looked at that data. We've actually been studying the basin for 5 years, looking at what other operators are doing. So we think it is ready to do that. But I would say that like still going on in the Permian, as you move to development, you continue to optimize. We do not we stress this all the time. We do not believe unconventionals or shales are a manufacturing process. We believe it's an innovative process that you standardize behind the point of innovation. And what that means is you're constantly learning as you do that. But here, for instance, in the STACK, it's not just things like the Meramec. The Osage is attractive here. There's more in the stack than that. So how we actually move to large scale development while continuing to unlock upside, We'll do that in the same way we've been doing it in the Permian and actually in the Montney as well. Okay, great. And a simple question. The Graven Eagle Ford result that you announced in the press release, would this well qualify as a premium location? You're talking about the Graben? Yes. Yes. What we've talked about for a while is we hit a lot of our greenfield acreage that remains in our Eagle Ford position sits in the graben. If you look at its history over the last kind of 5 years or so, it's been choppy, not just for us, but for the industry. It's got some geologic complexity in there and other things. So we've been studying this pretty hard. We've now got, I think, 3 strong wells in the play, using our advanced completions. And we haven't yet expanded that acreage into the premium category. But the 3 wells we've drilled this year would qualify for that. So we're working that carefully. But it's similar approach to what we used with the Austin Chalk, which is step our way into this carefully to make sure that we don't drill bad wells. And so we've had a measured approach to this, but we are excited about it. It's we've now got 3 very good wells. There's a lot of acreage there. We're not talking about a huge number, but 50 to 100 wells potentially that could be in the graben. But we're not yet ready to move those into the premium quite yet. I appreciate the color. I think since you guys continue to emphasize that the Eagle Ford is your best returning play, it's worth all our while to keep an eye on what you're doing in the Grubbin. Thanks for the color. Yes, Jeff. And I should just point out, I mean, that business in the 3rd quarter had operating margins of around $45 a barrel. I mean, this is incredible. It is and our team there has done a great job. All right. Thank you. Your next question comes from Asit Sen with Bank of America Merrill Lynch. Your line is open. Thanks. Good morning. I have a couple of quick ones. Doug, you mentioned you've been studying the space for 5 years. Just wondering, how long have you been looking at the deal? How did it come together? How competitive it was? Anything in those slides? Yes. And I really probably just best thing to do here is say the proxy will be filed shortly and all of that will come out there. But so I prefer not to make any real comment on that. But like I said, we study all of North America. We have this best rocks philosophy and the best parts of the best basins. If you go all the way back to our strategy work in 2013, we identified this is a basin that was going to be a premium basin and we think it's ready to take off. And it fit well with us, but I also have to say we wouldn't be doing this today if it wasn't accretive to the plan we've already laid out. Great. Thanks. And then on the accretion comment on to your 5 year plan, just curious, how does that relate to your liquids production CAGR of 20% on Encana standalone? How comfortable are you with that projection on a 5 year basis? Yes. We'll have to update that as we go into next year and I would anticipate we'll probably hold an Investor Day not too long after close to talk about those things. But this improves our liquid weighting. This is a liquids focused asset. That's our focus. We'll have to work through the numbers, but clearly that's why we entered this play is for its high quality liquids potential, particularly oil. Great. And last one for me. Doug, you mentioned drilling and completion improvements via cube style approach. And just again high level early days, just wondering what your early thoughts are on pad size, potential drilling cycle time, completion cycle time. What do you see as some of the operational risk of implementing that in the new basin? Yes. It's funny, Mike Macassar, our CEO is across from here, and he's looking quite worried because he thinks I'm probably about to set his targets for 2019. We think it really is ready for this. It's a little early to say, but we do think larger multi well pads, it's right for it. We think our multi rig, multi frac spread approach, which keeps cycle time down and drives additional efficiencies, we think it's ready for that. And I once again, I want to compliment the Newfield team. They were clearly moving in this direction and positioning the business for this around infrastructure and water and other things. So we expect to be able to gain those benefits next year. We think we'll be able to put that to work and start to see results in the second half. Great. Thank you. Your next question comes from Jeffrey Leboutian with Tudor, Pickering, Holt. Your line is open. Good morning. Thanks for taking my questions. In the STACK, the industry has really pushed spacing designs quite a bit there and it looks like operators are actually starting to outpace. As you look at Newfields assets and as you plan your development there, how are you thinking about spacing design and then comparing that to what industry has done so far? What's the opportunity set there to capture better well level efficiency and productivity in terms of URs? Yes. Jeff, it's a great question. And I think that I think some people have pointed to maybe inconsistency or choppy results. We actually, when we look at the play, aren't surprised by many of those results. We think it's a lot of it's tied back to parent child relationships and spacing and stacking orientation. So we think it is right now after a lot of the appraisal work that's gone on in the last few years to start to do this at scale. And I think you should see us do what we do elsewhere, which is actually develop and pilot new ideas in parallel, including what's the best spacing and stacking for the play, building off not only the great work Newfield's done, but what others in the industry do. One of the things we like to talk about in the company a lot is we don't care where the idea comes from. We just want to put it to work. So if it's ours or if it's an offset operator's, we just want to do this in real time. So I think that's going to evolve, but I would expect that you'll see more consistent results as you go to cube style development. Got it. And then looking at the SCOOP, Newfield's got a pretty decent size position there as well, but I guess historically hasn't been as active in the uphole horizons like the Springer and the Sycamore. Is there much baked in there for inventory now as you guys kind of looked at the dealers? Is that something you see as additive to inventory over time? It was great to get your thoughts on additional horizons there. Yes. I think it's a conservative view of inventory today. They're recognizing where the land position is, where the opportunities sit. There's a reasonable amount of non operated acreage in here too, which we have to think our way through. But there is real potential down there. As you know, a good Springer well is as good as any well drilled anywhere in North America today. So there is potential there for the future. Thank you. Your next question comes from Phil Skolnick with 8 Capital. Your line is open. Thanks. A couple of questions. First of all, is there a break fee and what's that amount? And also what amount of vote percentage wise is needed from both sides to get this cross line? Yes, I think I just push you to the proxy when it gets filed, which should be in the when it gets filed, which should be in the next couple of days. I believe the voting requirements are majority for our shareholders and 2 thirds for theirs. Okay, thanks. And the final one is, do you plan to hedge any of the production once this closes? Yes, Phil. I'm probably not going to answer that directly because it has some market sensitivity to it. We clearly have, if you look, it's disclosed in our 3Q, we have a good position built for 2019. They also have a position in 20 19. And we think about this as risk management. We've looked out across next year and said how much exposure do we have to commodity price. And the way we really think about it strategically today is about how to maintain our scale. If commodity price pull back sharply, I would expect us to pull capital back in parallel with that. But I think we have good protection for 2019 against that sort of uncertainty. Okay, great. Thanks. Your next question comes from Bob Morris with Citi. Your line is open. Actually, I thought I'd taken myself out of the queue. You pretty much addressed all my questions. So I'll just leave it at that. Thanks. Yes. Thanks, Bob. I did see your note last night, though. You had the Karnak the Great hat on from Johnny Carson days. Your next question comes from Bob Brackett with Bernstein Research. Your line is open. Hi. Are you surprised by the share price reaction to this announcement? I haven't Bob, I haven't even looked. Me and our Board and our team and I think the Newfield team believe this is a great We think We think this has got obvious benefits, clear synergies and fits what we're good at and completely consistent with strategy. Okay. If I pivot to something else, if we think about the Duvernay moving from sort of a growth asset into a free cash flow generating asset, what ultimately caused what could be perceived as a lack of success up there? Was it in basin pricing or was it a subsurface issue or something else? Yes, Bob, I wouldn't characterize it about disappointment. I mean, if you look at that asset, it's very efficient. The returns are good. Margins are about $30 a barrel oil equivalent today. Our team continues to drive efficiency and performance. It's just got more limited scale. And for us, partly that's due to the fact that it's a 50% owned asset. We have a partner there in PetroChina. But if you look at the history over the last 4 years or so, we've radically reduced cost. We've improved well performance. Our program this year, the wells we've drilled this year have been coming on over the last month or 2 are performing very well. This is a quality asset. The play is more active today than it's ever been in the history of the play. There are more rigs running now than ever before. One of the issues for us is just scale. It just can't grow to the same size as some of these others. Okay. That makes sense. Thank you. Thanks, Bob. Next question comes from John Herrlin with Citi General. Your line is open. Again, most things were asked, Doug. But you've not want to disclose much more given the proxy coming out, but would you at least say whether it was a data room, with the purchase? Whether it was a what? A data room. A data room situation. I think that's really a question for Newfield. I mean, we've negotiated this transaction with them, but I'd actually refer you to Newfield. Okay. Thank you. And we have a question from David Hyken with Hyken Energy. Your line is open. Clearing my throat on that one. As you thought about the acquisition and kind of the overall fit, is there an acceleration plan? And how do you think about the Houston office? Yes. On the plan there and the how capital will be deployed across the portfolio next year, we'll be working that hard and as I mentioned, guide, coincident, we hope with the little time to work through the details because we're going to be optimizing, if you will, the new company here and we would expect it to improve upon the business without assets in it. So we'll be working through that. As far as Houston goes, we intend to run the Anadarko asset out of Houston and we think that that's appropriate. They have a good team here, but we're very focused on how we do it. We call it a headquarterless model. We'll have 3 locations, Calgary, Denver and Houston. And actually, the work happens where the people are as opposed to the opposite. We do see some strong benefits here from combining the 2 teams, so. Well, welcome to Houston. Thanks, guys. At this time, we have completed the question and answer session and we'll turn the call back to Mr. Kohl. Thank you, operator. That concludes our call for today. This concludes today's conference call. You may now disconnect.