canadian oil and gas presented by: raphael stephanie beatrix vincent
TRANSCRIPT
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Canadian Oil and Gas
Presented by:
Raphael Stephanie Beatrix Vincent
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Agenda
1. Canadian Oil and Gas Industry 1. Canadian Oil and Gas Industry
2. Imperial Oil2. Imperial Oil
3. Suncor Energy3. Suncor Energy
4. Encana 4. Encana
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Canadian Oil and Gas Industry Analysis
By: Raphael Kan
Table of ContentsIndustry Overview Industry AnalysisSensitivity AnalysisTrend AnalysisMarket AnalysisRecommended Strategy
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Industry Overview
• Energy Sector contribute 5.6% ($62.8 billion) to Canadian GDP in 2003
• Canadian Oil and Gas Industry accounts for 38% ($23.8 billion) of the Energy Sector contribution
• In 2003, new capital investment in energy related industries represented 18.6% of total Canadian investment
• Combined, Toronto Stock Exchange and TSX Venture Exchange have 413 Oil and Gas Companies with a total value of over $299 billion.
• The Oil and Gas Industry itself accounts for more than 18% of the TSX total market capitalization
National Economic Importance:
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Industry Overview
• Total production of 3.1 million barrels per day in 2004– Seventh largest in the world– 99% of its export goes to U.S (largest source of oil for US)
• 179 billion barrels of proven reserve in 2005– Second largest in the world– Able to produce at current rates for the next 150-200 years
Key Stats - Oil
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Industry Overview
Type of Crude Oil produced in Canada
• Light crude oil: liquid petroleum with a gravity of 28°API or higher
• Heavy crude oil: liquid petroleum with a gravity below 28°API
• Bitumen: petroleum in semi-solid or solid form that is found in bituminous sands. It is so heavy (gravity below 12°API) and viscous that it will not flow unless heated or diluted.
• Synthetic crude oil: a product similar to a high-quality light crude oil. It is made by refining or upgrading heavy oil or bitumen.
• Condensates: hydrocarbons recovered from a natural gas reservoir.
• Pentanes: hydrocarbons containing molecules of 5 carbon atoms and 12 hydrogen atoms.
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Industry Overview
Sources of Canadian Oil Production:
• Offshore: Off the Atlantic coast of Newfoundland • Conventional Oil: Western Canada Sedimentary Basin• Oil Sands: Northern Alberta and Canadian Arctic
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Industry Overview
Conventional Oil– Petroleum found in liquid form, flowing naturally or capable of being pumped
without further processing or dilution – Cheaper to produce
Oil Sands Synthetic Crude Oil– Oil Sands is a thick mixture of sands, bitumen, mineral rich clays and water – Synthetic crude oil is extracted from oil sands and it is often sold at a premium
because of its high quality– More costly to produce– No drilling risk for the near surface oil sands
Conventional vs Oil Sands:
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Industry Overview
Ore Preparation• Strip-Mining
– The pick and shovel method used to recover oil sands that are near surface– 600,000 barrels per day 1.2m barrels per day in 2010
• In Situ– Includes various methods used to recover deeply buried bitumen deposits, including
steam injection, solvent injection and firefloods– 380,000 barrels per day 700,000 barrels per day in 2010– More than 80% of the Oil Sands reserve require this method
Extraction– Separates Bitumen from other molecules
Upgrading– Processes Bitumen into Synthetic Crude Oil and Vacuum Gas Oil
Synthetic Crude Production Process:
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Industry Overview
• Total production of 6.6 trillion cubic feet in 2002 – Third largest in the world– Almost all of its export goes to U.S.
• 56.1 trillion cubic feet of proven gas reserve in 2005– Only ranked 19th in the world– At current rates, production will deplete in 8.6 years
Key Stats – Natural Gas
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Industry Overview
Sources of Canadian Natural Gas Production:•Western Canadian Sedimentary Basin•Atlantic Coast•Arctic
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Industry Overview
• Upstream– Exploration and Production
• Midstream– Pipeline, Transportation and Storage
• Downstream– Refining, Marketing and Retailing
Industry Components
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Industry AnalysisTop 15 players by market capitalization
Company Name Market Cap ($Mil) ROE ROA Net Inc ($m) Type of firm
EnCana Corp 49,128 28.36 17.17 4572.5 Oil and Gas Producer
Imperial Oil 37,798 32.75 22.98 2033.0 Integrated
Suncor Energy 31,118 24.93 15.45 1100.0 Integrated
Shell Canada 30,932 21.32 18.63 1286.0 Integrated
Canadian Natural Resources 30,115 21.08 13.06 1405.0 Oil and Gas Producer
Husky Energy 24,598 16.24 11.48 1006.0 Integrated
Petro-Canada 23,056 21.52 20.6 1757.0 Integrated
Talisman Energy 20,677 13.89 9.87 663.0 Oil and Gas Producer
Nexen 13,730 32.09 12.97 793.0 Oil and Gas Producer
Precision Drilling 6,740 12.17 12.61 247.4 Oil and Gas Field Services
Western Oil Sands Inc 4,626 3.83 5.14 19.5 Oil and Gas Producer (Oil Sand only)
Ensign Energy Services 3,024 19.59 16.07 118.8 Oil and Gas Field Services
OPTI Canada Inc 2,945 0.08 0.67 0.6 Integrated (Oil Sand only)
Trican Well Service 2,763 30.9 31.81 59 Oil and Gas Field Services
Paramount Resources 2,181 7.35 7.89 41.2 Oil and Gas Producer
TSX Capped Energy AverageTSX Composite Average
12.94 11.28
10.59 7.89
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Industry Analysis
• Canada is the world leader of– Enhanced recovery techniques for mature reservoirs– Cold climate and offshore production– Gas processing, sulphur extraction and heavy oil upgrading– Oil Sands reserve– Development of Oil Sand projects
• Integrated with the world’s largest market for energy consumption, making it less costly to bring the products to market.
• Strong interest from China, the largest market for energy consumption in the future.
• Attractive crown royalty rate for oil sand projects
The Canadian Advantage
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Industry Analysis
• Tighter environmental regulation
• Kyoto Protocol
• Limited proven natural gas reserve
• Long run viability of oil sands project– It is estimated that crude price has to be above $25 a barrel for oil sand projects to be profitable
because of the high production costs
Factors that would determine the viability include:
– Invention of new drilling and refining technology
– Presence of alternative source of energy
– Oil production level of major producers such as OPEC and Russia
Risks and Constraints
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Sensitivity Analysis
0
10
20
30
40
50
60
70
80
0 50 100 150 200 250 300 350 400
TSX Capped Energy Index
Cru
de
Oil
Sp
ot
Pri
ceRegress TSX Capped Energy Index with Crude Oil Spot Price between 2001 to 2005
• R Square = 0.9116• Slope Coefficient = 4.3328
(A dollar change in crude price 4.3328 change in the Energy Index or 1.4467% change in the Energy Index as of Nov 7, 2005)
Strong correlation
Scattered Plots
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Trend Analysis
Factors that would affect energy prices
• Short term supply and demand• Rate of investment in the long term• Sentiments• Accidents such as
•Bad weather•Halting transport of oil from producers•Labour disputes (strikes)•War•Natural disaster
•Taxes - Crude price now represents less than a quarter of the price of oil products in many countries. Thus, taxes have significant influence over the price of oil products
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Trend Analysis - Oil
Global Oil Supply M
illi
on
bar
rels
per
d
ay
• Upward trend since 1985
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Trend Analysis - Oil
Global Oil Demand & Forecast•Expected to grow by more than 50% in the next 20 years •More than 50% are consumed by the transportation sector
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Trend Analysis - Oil
Global Oil Demand & Forecast• Emerging Asia, especially China is expected to more than double its demand in the next 20 years.
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Trend Analysis - Gas
Global Natural Gas Demand and Forecast
•Expected to grow at a slightly higher rate than crude oil demand
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Market Analysis
Correlation between Oil and Natural Gas Prices
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Market Analysis
Iran & Iraq war
Gulf War
Iranian revolution
OPEC 10% Quota IncreaseAsian Economic Crisis
Series of OPEC cuts
War on “terrorism”
Historical Oil Price Analysis• Even at the current $60 level, the impact on consumers is not as big as in the early 80s during the Iran and Iraq war
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Market Analysis
TSX Capped Energy Index
TSX Composite Index
S&P 500
Comparison of TSX Capped Energy Index against TSX Composite and S&P 500 from 2001~2005
Outperform by more than 100%
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Market Analysis
• Prices of petroleum products and natural gas will remain high due to tight international supplies and hurricane induced short term supply losses
• Many fund managers still favour the energy sector though some has started shifting assets to the consumer staple sector based on the sector rotation model
• Very few analysts and industry executives believe that the crude price will ever fall back to the level of $30 per barrel
Market Outlook
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Recommended Strategy
One should look for:• Larger companies with strong financial resources
• Companies that have good track records of positive relationships with all stakeholders
• Companies that have strong presence in oil sands but are relatively diversified
• Companies that already demonstrate superior cost structure and lower production costs.
Selection Criteria For Long Term Investment
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Imperial Oil
by Stephanie Zhang
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Background
• History– Founded in 1880, Ontario.
– 6% of total Canadian primary energy supply
– Head Office: Calgary in 2005
– Stock trading symbol: IMO
– Stock Exchanges: TSX, AMEX.
• Current price: $87.29. Rating: AAA
– 69.9% shares, Exxon Mobil Corporation
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Corporate Profile
Largest integrated in Canada-market cap: C$40 billion
-2004-EAT $2.1 billion; ROCE 28%
Largest producers of crude oil
and natural gas-360,000 oil-equivalent barrels a day
Largest petroleum producers-ESSO
Largest chemical producers
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Imperial Management
• CEO: Tim J. Hearn
• Business Strategy– Increase long-term shareholder’s value– Invest in attractive growth opportunities
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Management Performance
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Investment Strategy
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Imperial Performance
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Imperial Performance
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Business Segments
• Three product segments:– Natural Resources (Upstream)
• Conventional Oil and Gas• Oil sands operation
– Petroleum Products (Downstream)• Refining, distributing and marketing
– Chemicals
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Natural Resources
• Conventional oil and gas– Nine conventional oil and gas sites– The Mackenzie gas project
• Oil sands operation– Cold Lake– Syncrude – Drilling lease at Kearl
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Mackenzie gas project
• Development of Canadian onshore gas resources in 2004
– 1220-kilometre natural gas pipeline system
• Co-venture with – ConocoPhillips, Shell Canada,
ExxonMobil Canada and the Aboriginal Pipeline Group.
• Total project investment is estimated at $7 billion.
• Halted in 2004.
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Oil sands operation
• Cold lake– Wholly owned, 1960’s.
– largest thermal heavy-oil recovery operations in the world.
• Syncrude – largest oil-sands project in the world, 1975
– 60,000 barrels a day for Imperial.
• Drilling lease at Kearl
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Cold Lake
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Cold Lake
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Syncrude Joint Venture
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Kearl
• Mining project with ExxonMobil Canada at Fort McMurrary, in 2004.
• Imperial Oil (70%) and ExxonMobil Canada (30%)• Estimated cost 4.5 –6.5 billion• 300,000 barrels per day over 40 years
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Net Production
0
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40
60
80
100
120
140
2000 2001 2002 2003 2004
Year
Mil
lio
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of
ba
rre
ls
Conventional Oil and GasCold LakeSyncrude
Mackenzie gas project
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Financial Performance of Natural Resources Segment
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Petroleum Products Segment
• The largest producer and marketer of petroleum products in Canada.
• 1916 Gasoline Station
• 2005 A network of 1,978 Esso service stations across Canada.
-Four refineries in Canada.
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Imperial Refining Centers
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Challenges in Petroleum Market
• Intense competition
• Surplus capacity
• Environmental legislation and low return on investment
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Financial Performance of Petroleum Segment
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Chemicals Segment
• The Chemicals segment manages the technology, manufacturing, marketing and distribution of petrochemicals, and markets its products both domestically and internationally. Imperial is one of the largest chemical manufacturers and marketers based in Canada.
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Chemicals Segment Map
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Chemicals
• The largest market share in domestic solvents in Canada
• The largest market share in North America for polyethylene used in rotational molding
• Two main products: – polyethylene and benzene
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Financial Performance of Chemicals Segment
Polyethylene and Benzene
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Business Segments
Imperial Oil Business Segments-Operating Profit
2004
Natural Resources
70.21%
Petroleum Products
23.40%
Corporate and Other
1.41%
Chemicals4.98%
Imperial Oil Business Segments-Sales 2004
Petroleum Products76.56%
Natural Resources
17.56% Chemicals5.72%
Corporate and Other
0.16%
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Financial Statement Analysis
• Income statement• Cash flow statement• Balance sheet• Statement of shareholder’s equity
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30-Jun-05 31-Mar-05 31-Dec-04 30-Sep-04435,788 323,046 201,776 780,320
174,825 195,636 101,912 330,592 -115,924 -53,430 143,703 -117,03225,242 -171,798 49,777 -171,848
132,861 156,180 -118,669 606,224 -25,970 -266,328 190,430 -66,71246,965 -230,160 39,024 -
673,788 ($46,854) 607,954 1,366,752
-280,156 -249,888 -200,493 -494,112- - -26,570 -
79,737 5,754 -9,309 44,896
-200,419 -244,134 -236,372 -449,216
-62,093 -63,294 -25,205 -118,960-382,699 -254,820 -141,228 -307,136
-806 -822 -170 256 - - - -
-445,598 -318,936 -166,603 -425,840- - - -
$27,771 ($609,924) $204,979 $491,696 Change In Cash and Cash Equivalents
Financing Activities, Cash Flows Provided By or Used InDividends PaidSale Purchase of StockNet Borrowings
Adjustments To Net IncomeChanges In Accounts ReceivablesChanges In Liabilities
PERIOD ENDINGNet IncomeOperating Activities, Cash Flows Provided By or Used In Depreciation
Changes In InventoriesChanges In Other Operating Activities
Total Cash Flow From Operating Activities
Investing Activities, Cash Flows Provided By or Used InCapital ExpendituresInvestmentsOther Cashflows from Investing Activities
Total Cash Flows From Investing Activities
Other Cash Flows from Financing Activities
Total Cash Flows From Financing ActivitiesEffect Of Exchange Rate Changes
Quarterly Cash Flow
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Imperial Key Statistics
2004 2003 2002 2001 2000LIQUIDITYCurrent Ratio 0.84 0.78 1.09 0.89 1.02Quick Ratio 0.62 0.52 0.77 0.62 0.74Working Capital Per Share -1.81 -1.63 0.4 -0.57 0.1Cash Flow Per Share 7.04 5.19 3.2 3.25 3.59ACTIVITYInventory Turnover 32.29 30.43 29.31 28.77 30.71Receivables Turnover 14.84 14.76 13.43 12.38 12.42Total Asset Turnover 1.66 1.62 1.39 1.41 1.56Average Collection Period (Days) 24 24 27 29 29PERFORMANCESales/Net Property, Plant & Equip 2.19 1.94 1.84 2.07 2.26Sales/Stockholder Equity 3.34 3.09 3 3.61 3.85PROFITABILITYOperating Margin Before Depr (%) 18.4 16.32 15.1 16.7 17.91Operating Margin After Depr (%) 14.1 12.11 10.61 12.21 13.56Pretax Profit Margin (%) 14.32 13.24 11.37 11.88 13.95Net Profit Margin (%) 9.7 9.43 7.73 7.79 8.54Return on Assets (%) 14.63 13.61 10.2 11.56 12.65Return on Equity (%) 32.46 29.11 23.22 28.09 32.86Return on Investment (%) 30.68 25.34 18.12 23.32 27.05LEVERAGEInterest Coverage Before Tax 74.83 57.24 43.41 24.42 22.1Interest Coverage After Tax 51.05 41.05 29.81 16.36 13.91Long-Term Debt/Common Equity (%) 5.81 14.87 28.13 20.46 21.48Total Debt/Invested Capital (%) 21.57 21.58 23.03 25.6 24.67DIVIDENDSDividend Payout (%) 15.3 19.2 26.28 26.05 22.89Dividend Yield (%) 1.15 1.42 1.88 1.91 1.99
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Value Drivers
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Risks
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Stock Price
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Fisher’s 4D
• Functional Factors:– Leader in the industry
• People Factors– Management with long-term view
• Essential Business Characteristics:– Price sensitive market– Diversified products and services– Integrated oil and gas company– No hedge
• Stock Value– High P/E– Persistent return
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Recommendation
-
Price sensitive
Uncertain commodity price
Volatile markets
+
Leader in the market
Sustainable growth
Disciplined business strategy
Outperform major indices
BUY
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Suncor Energy
by Beatrix Wiriahardja
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Agenda
• Company Background• Management Team• Integrated Stategy
• Oil Sands• Natural Gas• Refining and Marketing – Canada• Refining and Marketing – US
• Analysis on Suncor’s Consolidated Financial Statements• Stock Information as of Nov 4, 2005• Recommendation
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About Suncor
• An integrated energy company
• Strategically focused on developing one of the world’s largest petroleum resource basins – Canada’s Athabasca oils sands
• Pioneering the industry in 1967 and became a publicly traded company in 1992
• The core oil sands business is supported by conventional natural gas production in Western Canada and downstream refining, marketing and retail businesses in Ontario and Colorado
• Significant progress since 1992:– Daily oil sands production has more than tripled
– One of the lowest cost producers in North America
– Growth in market capitalization ($1 billion to more than $19 billion at the end of 2004)
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Corporate Committee
• Richard George – President & CEO since 1991
• Kenneth Alley – Senior VP & CFO since 2003 (join Suncor in 1984)
• Mike Ashar – Executive VP, Refining and Marketing since 2003
(join Suncor in 1987)
• David Byler – Executive VP, Natural Gas & Renewable Energy since 2000
(join Suncor in 1979)
• Terrence Hopwood – Senior VP & General Council since 2002
(join Suncor in 1988)
• Sue Lee – Senior VP, HR & Communications since 1996
• Kevin Nabholz – Senior VP, Major projects since 2002
(join Suncor in 1986)
• Steven Williams – Executive VP Oil Sands since 2003 (join Suncor in 2002)
• Thomas Ryley – Executive VP, Energy Marketing & Refining
(join Suncor in 1983)
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Employees’ Benefits
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Integrated Strategy
• 4 major business divisions:
1. Oil Sands
2. Natural Gas and Renewable Energy – produce in Western Canada
3. Energy Marketing and Refining – Ontario
4. Refining and Marketing – Colorado
With a high quality resource base that it is estimated to contain the raw materials to produce a potential 11 billion barrels of conventional crude oil, Suncor doesn’t need to look for new oil reservoirs. Instead it can focus on developing the technology and expertise to produce higher value crude oil products, increase production and improve operational flexibility.
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Integrated Strategy
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Oil Sands
• Located near Fort McMurray, Alberta • Recovers bitumen through mining and in-situ development
and upgrades it into refinery feedstock, diesel fuel and by products.
• The foundation of Suncor’s growth strategy and represents the most significant portion of the company’s assets.
• Suncor pioneered the world’s first commercially successful oil sands operation in 1967 and today, with total production nearing the one billion barrel mark and enough reserves to sustain production for the next 50 years, the company remains a leader in oil sands development.
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Oil Sands
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Subsequent Event
• A fire on January 4, 2005, caused significant damage to Oil Sands Upgrader 2, reducing upgraded crude oil production capacity from base operations to about 110,000 bpd.
• Repair work is under way and Oil Sands expect to return to full production capacity of 225,000 bpd in the third quarter of 2005.
• To mitigate the impact of reduced production during the recovery period, Oil Sands plans to bring forward as many maintenance projects as possible, including all, or significant portions of, a maintenance shutdown previously planned for the fall.
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Outlook & Risk/Success Factors
• Outlook:– Continues to work towards an operational target of ½ million barrels per day
• Risk/ Success Factors:– Final amount and timing of the settlement and payment of insurance
proceeds related to fire damage
– Additional maintenance schedules related to returning Oil Sands to full production
– Ability to finance Oil Sands growth in a volatile commodity pricing environment
– The ability to complete future projects both on time and on budget
– Potential changes in the demand for refinery feedstock and diesel fuel
– Volatility in crude oil and natural gas prices and exchange factors and the light/heavy and sweet/sour crude oil differentials
– Relationship with trade unions
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Natural Gas
• Primarily produces conventional natural gas in Western Canada
• Serves as a price hedge that provides the company with a degree of protection from volatile market prices of natural gas purchased for internal consumption.
• To ensure natural gas production keeps pace with company-wide natural gas purchases, NG is targeting production increases of 3% to 5% per year.
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Natural Gas Production
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Outlook & Risk/Success Factors
• Outlook:– Continues to work towards an operational target of increasing production by
3% to 5% per year to keep pace with the company’s growing internal natural gas demands.
• Risk/Success Factors Affecting Performance:1. Consistently and competitively finding and developing reserves that can be
brought on stream economically.
2. The impact of market demand for land and services on capital and operating costs.
3. Risks and uncertainties associated with obtaining regulatory approval for exploration and development activities in Canada and the United States.
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Marketing and Refining - Cad
• Operates a 70,000 barrel per day (bpd) capacity refinery in Sarnia, Ontario
• Markets refined products to industrial, wholesale and commercial customers primarily in Ontario and Quebec
• Markets products to retail customers in Ontario through its Sunoco-branded and joint-venture operated service networks
• Encompasses third-party energy marketing and trading activities, as well as providing marketing services for the sale of crude oil and natural gas from the Oil Sands and NG operations.
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Outlook & Risk/Success Factors
• Outlook:
– Construction on a diesel desulphurization project at the Sarnia refinery to meet current and anticipated federal sulphur regulations.
– Construction of a planned ethanol plant is expected to begin in 2005 and be completed by 2006, subject to regulatory approvals. This facility is expected to produce ethanol at a for blending into Sunoco-branded and Suncor joint-venture retail gasolines.
– As a result of the fire incident, M&R may be required to purchase additional synthetic crude oil feedstock to meet demand, resulting in higher purchased product costs.
• Risk/Success Factors Affecting Performance:
– Fluctuations in demand and supply for refined products, margin and price volatility.
– The risk of cost overruns for the execution of capital projects.– Numerous risks and uncertainties that could affect construction schedules of
the diesel desulphurization project.
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Refining and Marketing - US
• Downstream assets based in Denver, Colorado (acquired in August 2003) – This acquisition is part of an integration strategy aimed at improving
access to the North American energy markets through acquisitions, long-term contracts and possible joint-ventures.
• Operates a 60,000 barrel per day (bpd) capacity refinery
• Markets refined products to customers primarily in Colorado, including retail marketing through 43 Phillips 66-branded retail stations in the Denver area.
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Outlook & Risk/Success Factors
• Outlook:
– Approximately $260m on new capital project– Spend $29 million by 2006 to meet existing obligations between the refinery and the
United States Environmental Protection Agency and the State of Colorado. – 42-day scheduled maintenance is planned for pipeline and refinery equipment. – R&M’s existing four-year contract with the local Paper, Allied-Industrial Chemical and
Energy Workers International Union, which applies to hourly wage employees at the refinery, will expire in January 2006.
• Risk/Success Factors Affecting Performance:
– Fluctuations in demand for refined products, margin and price volatility and market competitiveness
– The risks associated with the execution of the fuels desulphurization project– Numerous risks and uncertainties can affect construction schedules– A weaker Canadian dollar would result in a higher funding requirement for U.S. capital
programs.
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Consolidated Financial Statements
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2004 - Promised and Delivered
• Reduce lost-time injury frequencies.• Increase oil sands production to an average of 225,000 to 230,000 bpd. • Increase natural gas production volumes to 190 to 195 million cubic feet
per day (mmcf/d). • Maintain base oil sands cash operating costs at an annual average of
$10.75 to $11.75 per barrel. • Build for future oil sands growth and advance operations through use of
improved technology. • Advance downstream integration plans. Maintain a strong balance
sheet.• Continue to pursue energy efficiencies, greenhouse gas offsets and new
renewable energy projects.
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Risk/ Success Factors
• Commodity prices• Exchange rates• Environmental regulations• Stakeholder support for growth plans• Extreme winter weather• Regional labour issues• Each business segment Risk/Success factors
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Sensitivity Analysis
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Income Statements
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Revenues
• Revenues INCREASE: $2050 millions (31% increase from 2003)
• The increase resulted primarily from:– Higher average commodity price (offset by a 7% increase in the average CDN$/ US$
exchange rate) increased revenue by $1.2 billion
– Increase crude oil production increased revenue by approx $220 million
– Higher refined product wholesale and retail prices, increase in sales volumes, one full year of operations of the Refining and Marketing division increased revenue by approx $890 million
• These increased is partially offset by hedging losses reduced revenue by approx $380 million
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Expenses
• Purchases of crude oil and crude oil products INCREASE– Higher benchmark crude oil feedstock prices, – Higher volume and refined products feedstock required as a result of 1 full year of operations for R&M
• Operating, Selling and General INCREASE– The effects of 12 months of operations at R&M - US– Higher operating expense higher energy costs– Higher cost for obtaining certification under the Sarbanes-Oxley Act, and higher stock-based compensation expense– Increased maintenance activities
• Royalty expense INCREASE by $139 million
• Financing expense INCREASE– Lower foreign exchange gains on the Suncor’s US$ denominated long-term debt
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Net Income
• Revenue increased by 31%, Expenses increased by 46%
Earnings Before Income Taxes decreased by 9%
• Income Tax expense DECREASED– Changes in tax rates (from 40% to 33%)
• Net Income, EPS Constant
• Cash Dividend INCREASE by 19%
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Consolidated Net Income
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Net Income Analysis
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Balance Sheet Statements
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Analysis of Balance Sheet
• Increased in AR - due to higher sales volumes and higher price
• Increased in Property, Plant and Equipment – due to company’s expansion
• Increased in AP and accrued liabilities related to increased capital spending in the fourth quarter and higher accrued royalties payable
• Decreased in Preferred Shares - On March 15, 2004, the company redeemed all of its then outstanding 9.05% and 9.125% preferred securities for total cash consideration of $493 million
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Derivative Financial Instruments
• Commodity Hedging Activities – To hedge against the potential adverse impact of changing market prices due to
variations in underlying commodity indices– Suncor did not enter into any new arrangements in 2004. The strength of the its
financial position, combined with stable operating costs and a growing production base, reduces the company’s risk to crude oil price volatility.
– Prior to the suspension of the hedging program, Suncor had entered contracts to fix the price on 36,000 barrels of crude oil per day at an average price of US$23 per barrel, which resulted in decreased in net earnings by $397 million.
• Financial Hedging – Risk management strategy to manage exposure to interest rate fluctuations – The interest rate swap contracts involve an exchange of floating rate and fixed rate
interest payments between the company and investment grade counterparties
• Energy Trading Activities – Energy trading activities focus on the commodities the company produces. – To gain market information and earn trading revenues
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Cash Flow Statements
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Statement of Cash Flow
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Cash Flow from Operations
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Cash Flow Analysis
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Cash Flow to Cap Ex
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Return on Capital Employed (ROCE)
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Return on Capital Employed
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Capital Employed
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Return on Capital Employed
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5 Years Financial Summary
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Financial Performance
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5 Years Indicators
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5 Years Financial Summary
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Financial Ratios
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Financial Ratios
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Stock Information
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Fundamental Data
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Stock Info as of Nov 4, 2005
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Total Return on Investment
• Suncor’s return to shareholders has outperformed the TSX Integrated Oils and the S&P 500.
• An investment of $100 in Suncor on December 31, 1992 – the year it became publicly traded – would have grown to more than $2,538 by the end of 2004
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Fisher Approach
1. Functional Factors:• High quality resource base - estimated to contain the raw materials to produce
a potential 11 billion barrels of conventional crude oil• One of the lowest cost producers in North America
2. People Factors:• Experienced managers and directors• Maintain a steady core of expertise – all projects are managed by Suncor’s
internal engineering, procurement and construction management
3. Essential Business Characteristics:• Strong competitive position• Integrated Company
4. Value of the Stock:• 9% below the 52 week high and 43% above the 52 week low• High PE ratio
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Recommendations
BUY
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ENCANA
by Vincent Prasetio
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Encana’s Agenda
• History and Background• Current Event• Management• Company overview• Core Business Unit• Corporate Value Drivers• Reserves• Risk Management• Financial Statement Analysis
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History and Background
• In 2002, merger agreement was reached between two energy company:
– Alberta Energy (AEC)– PanCanadian Energy (PCE)
• Alberta Energy is created by the government of Alberta in 1975
– By 1993 Alberta government sold the entire ownership to make AEC as the public owned company
– By 1995, AEC put its growth strategy on oil and gas after selling off all other resource investment.
– By 2001, AEC has become the largest natural gas producer and also largest independent operator of gas storage.
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History and Background
• PanCanadian was created by Canadian Pacific and gas company in 1958
– PanCanadian roots go back to the construction of the nation first transcontinental railways
– Canadian Pacific Railways made natural gas discovery in 1883 and later create Canadian Pacific and gas company in 1958 which later create PanCanadian in 1973
– In 2000, PanCanadian launches one of the continent largest CO2 miscible flood project at Weybury, Saskatchewan
• In 2002, Gwyn Morgan and David O’Brien announced the merger agreement between AEC and PanCanadian.
– Each AEC Share was converted to 1.472 PanCanadian Share.– On April 8, Encana begin trading on the TSX and NYSE under the symbol ECA.
Its enterprise value now is around 52 billion.
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History and Background
http://www.encana.com/whoweare/history/index.html
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Current event
• Encana to sell its Natural gas liquid business for US 586 million
• Encana CEO step down at year end; COO Randy Eresman continue to succeed
• Encana third quarter cash flow reaches US 1.93 billion or $2.20 per share up 51 %
• Speculations of takeover rumor by Royal Dutch Shell
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Management Team
• Gwyn Morgan, President and CEO
– In 1994, he was appointed as the president and CEO of Alberta Energy Company
– Has joined AEC for over 35 years and has a lot of experience in oil and gas exploration, production and pipeline
– Responsible for establishing Encana as the high performance benchmark
– Will step down as CEO in 2006 and continue work as the executive vice-chairman
• Randy Eresman, VP and COO
– Key Architect of the company North American’s resource play strategy
– Has over 25 years of career experience with Encana and AEC
– Will step up and taking the role as the new CEO in 2006
• Brian Ferguson, VP for corporate development– has 21 years of experience in the oil industry
– Key in providing expert of business development and communication advice on company major transactions and event
• John D Watson, VP and CFO
– Directly responsible for capital market, and financial risk management
– One of the architect behind the merger that forms Encana
– Has over 30 years of experience in financial experience
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Company Overview
• MissionEnergy for People
• VisionEnCana will be the world's High Performance Benchmark independent oil and gas company.
• Constitutional Meritocracy
EnCana is a company where shared principles guide our behaviour and merit determines our reward
• Our Shared PrincipleStrong Character, Ethical Behaviour, high performance, great expectation, Dynamic and discipline.
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Company Overview
• Business Strategy:
1) Focus its company operation on Resource Play compared to the vast majority that is in search of new conventional field.
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Company Overview- Business Strategy
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Company Overview– Business Strategy
2.Divesture of conventional asset and International operation other than North America
Asset to be divestured in 2005:- Gulf of Mexico
2.1 billion (closed)
- Canadian conventional326 million (closed)
- Ecuador1.42 billion will close at Q4 2005
- Natural Gas Liquid BusinessTargeted for Q4 of 2005
- Gas Storage BusinessTargeted for Q1 of 2006
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Company Overview— Business Strategy
3 Acquisition• Acquisition Tom Brown Inc to strengthen the asset position for $2.7
billion to increase Net Asset Value of share
• This acquisition align with the resource play strategy
• Tom Brown Inc appear to be undervalued by the appraisal compared to the potential resource calculated by unconventional way
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Company Overview— Business Strategy
• Acquisition and Capital Investment
• Since 2002: • Has invested 6.3 billion in key
resource development
• Invested 4.3 billion in property and corporate acquisition
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Company Overview— Business Strategy
4 Improve TechnologyCurrent Technology
- CO2 Miscible Flood
Ex : Weyburn
Project
- Coalbed Methane
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Company Overview— Business Strategy
4. Technology (continued) - GL-Dhows
allow to separate gas and
liquid; oil and water
- SAGD
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Core Business Units
• Upstream (Natural gas, Crude Oil and NGL)• Midstream and marketing( Natural gas storage,
natural gas liquids extraction and power generation • Corporate
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Upstream operation
•Upstream income increase by 30% compared to increase of 87% from 2002 to 2003
•North Amercian Production and mineral taxes for produced gas increased 76% in 2004 compared to 2003 primarily due to increased in natural gas prices and volumes in US and higher effective tax rate on production growth in Colorado
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Midstream and Market Optimization
• Revenues and purchased products expense in this sector increased in 2004 compared to 2003 result due to increases in commodity prices
• operating cash flow increase 68 million in 2004 as a result of improved margin from natural gas liquids and gas storage optimization
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Corporate
• Revenues happen to be losses since there is unrealized mark to market losses related to financial and commodity contract
• While the interest expense increase drastically because of higher outstanding debt level during the purchase of TBI
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CAPEX Summaries
•The CAPEX is increasing by 22% compared to 24 % from 2002 to 2003.
• The increasing CAPEX in upstream and acquisition is offset by disposition some of the asset
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Corporate Value Drivers
• Increase production capacity from existing assets.
• Reduce operating costs of existing assets through economies of scale and by upgrading process technologies.
• Increase reserves (asset base) by pursuing new developments.
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Reserves Resource Play
• 10 Key Resource Play
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Proved Reserves
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Reserves Resource Play
1. Greater Sierra
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Reserves Resource Play
2. Cutbank Ridge
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Reserves Resource Play
• Coalbed Methane
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Reserves Resource Play
4. Shallow Gas
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Reserves Resource Play
5. Jonah
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Reserves Resource Play
6. Piceance
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Reserves Resource Play
7. Fort Worth
8. East Texas
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Reserves Resource Play
9. Foster Creek
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Reserves Resource Play
10. Pelican Lake
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Risk Management
• Financial (commodity price, foreign exchange, interest rate & credit risks)
• Operational• Environmental, health, safety and security• Reputational
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Risk Management – Commodity Price Risk
• Lock in near term ROI
• Downside protection for Cash flow
• Combination of fixed price swaps & put options
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Stock Information
• Stock is traded in NYSE and TSX • Its symbol is ECA and ECA-T for TSX
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Analysis of Income Statement
• Net Earning from Continued Operation is increase by 3% to 2.2 from 2.1
• Its large net income in 2004 is basically earned from the discontinued operation income 1.3 billion compared to 0.2 billion in 2003
• Maintain a steady based stock compensation 17 million and planning to reduce the number of stock of stock based compensation
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Analysis of Balance Sheet
• 50% of its asset were financed through Debt and the other 50% through shareholder Equity
• Its liquidity level to pay its current debt is high 1.18 compared to 1.26 in 2003
• Number of debt outstanding increased by 1 billion caused of the purchase of TBI must be accommodated by borrowing
• Property, Plant and Equipment is increased by 30% from 17,770 to 23,140 million
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Analysis of Cash Flow
• Cash Flow from from Continuing operating Increased to 5.0 billion from 4.5 billion (up 11%)
• While Cash flow from operating is 4.5 billion compared to 4.3 billion (effect of discontinued operation, other change in asset and liabilities and non cash working capital)
• Free Cash Flow = 4.5 – 2.3 – 4.8 = -2.6 billion
• They Maintain a steady investment on CAPEX while buying Tom Brown Inc as their business combination.
• They are paying an increasing dividend by (32%) and purchase a number of shares
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Financing Activities
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Stock Performance: three year Chart Encana
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Stock Performance: 1-year Chart Encana VS S&P 500 Energy
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Brokerage House and My Recommendation
Buy:
1. Company is the leader in the natural gas industry and also in the natural gas storage
2. Strategy to focus on unconventional reserves and North America produce lower operation cost than the increasing cost in Europe and also higher rate of reserves in the future
3. New CFO will step up as the CEO understand the company operationally and financially will result in higher return investment made