Encana Corporation 2003 Annual Report to Shareholders
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ENCANA CORPORATION 2003 ANNUAL REPORT TO SHAREHOLDERS What Matters CONTENTS ENCANA TOTAL RETURN VS. MAJOR INDICES 3 Highlights (December 31, 2001 = 100) 4 Chief Executive 160 Officer’s Message 14 Chief Operating Officer’s Message 140 18 Upstream 120 19 Resource Play Illustration (Fold-out) 20 Canadian Plains 100 22 Canadian Foothills & Frontier 80 24 U.S.A. 26 Ecuador Q4/01 Q1/02 Q2/02 Q3/02 Q4/02 Q1/03 Q2/03 Q3/03 Q4/03 27 U.K. ECA NYSE ECA TSX S&P/TSX Composite S&P 500 28 Exploration 29 Reserves 30 Midstream & Marketing 34 EnCanans 36 Corporate Responsibility 42 Chairman’s Message 46 Note Regarding Forward-Looking Statements U.S. DOLLAR AND U.S. PROTOCOL REPORTING 47 Note Regarding Reserves Starting with year-end 2003, EnCana is reporting its financial and Data and Other Oil and operating results following U.S. protocols in order to facilitate a more Gas Information direct comparison to other North American upstream exploration and 48 Financials development companies. Financial results are reported in U.S. dollars and operating results, namely production and reserves, are reported on 48 Management’s an after-royalties basis. See page 47 for a more detailed Note Regarding Discussion and Analysis Reserves Data and Other Oil and Gas Information. 73 Management Report 74 Auditors’ Report ADVISORY 75 Consolidated Financial Certain information regarding the Company and its subsidiaries set forth Statements in this document, including management’s assessment of the Company’s 78 Notes to Consolidated future plans and operations, may constitute “forward-looking Financial Statements statements” under applicable securities laws and necessarily involve risks 115 Supplementary Oil and uncertainties associated with future events. As a consequence, actual and Gas Information results may differ materially from those anticipated in the forward- (unaudited) looking statements. See page 46 for a more detailed Note. 121 Supplemental For convenience, references in this Annual Report to “EnCana”, the Information (unaudited) “Company” or the “company”, may, where applicable, refer only to or include any relevant direct and indirect subsidiary corporations and 128 Corporate Information partnerships (each a “Subsidiary” or if more than one, “Subsidiaries”) 130 Investor Information and the assets, activities and initiatives thereof. References to financial results of operations refer to the consolidated financial results of EnCana Corporation and its Subsidiaries, taken as a whole, except where otherwise noted or the context otherwise implies. This Annual Report contains references to measures commonly referred to as non-GAAP measures. Additional disclosure relating to these measures is set forth in Management’s Discussion and Analysis on pages 51, 52 and 61 of this Annual Report. UPSTREAM RESOURCE PLAY RESERVES CORPORATE FINANCIALS EnCana’s key These unconventional Employing the most RESPONSIBILITY In its financial competitive advantages plays form the rigorous practices in its EnCana’s reputation disclosure, EnCana include: a vast and foundation of EnCana’s reserves assessment is is critical to the strives to achieve a level abundant asset base; low-risk, predictable an EnCana hallmark. creation of long-term of transparency and leading technical and profitable Each year, 100 percent shareholder value. clarity among the best competencies; low production and reserves of its reserves are The company’s success in its industry. The operating costs; low growth. Making up evaluated by independent on the bottom line financial statements royalties; high working about 60 percent of qualified reserve is reinforced by its have been presented in interest and well- current North American evaluators right from behaviour beyond U.S. dollars. Reserves developed infrastructure. production, these the fundamental the bottom line. quantities and plays are expected to geological and production volumes Page Page contribute about engineering data. are presented on an 18 80 percent of the 36 after-royalties basis. company’s North Page Page American production 29 by year-end 2007. 46 Page19 Growth&Returns Matter ENCANA CORPORATION 1 ENCANA CORPORATION Alaska Mackenzie Delta U.K. central North Sea Western Canada Canada East Coast U.S. Rockies Gulf of Mexico Middle East Africa Ecuador PROFILE 2003 SALES BY COUNTRY 2003 YEAR-END PROVED RESERVES BY COUNTRY SALES IN NORTH AMERICA % = 64% Canada 24% U.S.A. 91 7% Ecuador 5% U.K. % + 2003 CAPITAL INVESTMENT % 74WESTERN CANADA Over two-thirds of 17 Western Canada U.S.A. sales are natural gas Gas sales grow by nearly 50% 63% Canada 20% U.S.A. % % 7% Ecuador 7 % 2 + = 5% Midstream & Marketing 4% U.K. U.K. ECUADOR INTERNATIONAL 1% Other Countries First oil expected from Buzzard New pipeline helps SALES development in late 2006 double daily oil sales 9 EnCana is one of the world’s leading independent oil and gas companies and North America’s largest independent natural gas producer and gas storage operator. Ninety percent of the company’s assets are located in North America. EnCana is the largest producer and landholder in Western Canada and is a key player in Canada’s emerging offshore East Coast basins. Through its U.S. subsidiaries, EnCana is one of the largest gas explorers and producers in the Rocky Mountain states and has a strong position in the deep water Gulf of Mexico. International subsidiaries operate two key high potential international growth regions: Ecuador, where it is the largest private sector oil producer, and the U.K., where it is the operator of a large oil discovery. EnCana and its subsidiaries also conduct high upside potential new ventures exploration in other parts of the world. EnCana common shares trade on the Toronto and New York stock exchanges under the symbol ECA. 2 2003 ANNUAL REPORT HIGHLIGHTS RESERVES PER SHARE SALES PER 1,000 SHARES CASH FLOW PER SHARE (Year-end, BOE) (BOE) (US$) 5.1 500.6 $9.30 457.8 4.4 Total reserves Profitable Production grew by 16% production growth and per share, growth of strong commodity nearly all 9% per share $5.54 prices generated through the achieved 68% growth drill bit. in 2003. in cash flow per share. 02* 03 02* 03 02* 03 FINANCIAL HIGHLIGHTS 2003 2002* % Change US$ millions, Cash Flow 4,459 2,664 67 except per share Per Share – basic 9.41 5.62 67 amounts Per Share – diluted 9.30 5.54 68 Net Earnings 2,360 833 183 Per Share – basic 4.98 1.76 183 Per Share – diluted 4.92 1.73 184 Earnings from Continuing Operations, excluding foreign exchange translation of U.S. dollar debt issued in Canada (after-tax) and tax rate change gain 1,375 697 97 Per Share – diluted 2.87 1.45 98 Upstream Capital Investment 4,939 3,410 Midstream & Marketing and Corporate Capital Investment 383 97 Divestitures (including Discontinued Operations) (1,900) (273) Net Capital Investment 3,422 3,234 Debt-to-Capitalization Ratio 34:66 31:69 Debt-to-EBITDA (times) 1.3 1.0 Return on Capital Employed (%) 17 8 Return on Common Equity (%) 24 9 OPERATING HIGHLIGHTS 2003 2002* % Change Natural Gas Sales (MMcf/d) Canada 1,965 1,975 -1 U.S.A. 588 395 49 U.K. 13 10 30 2,566 2,380 8 Oil and NGLs Sales (bbls/d) Canada 156,604 143,465 9 U.S.A. 9,291 7,019 32 U.K. 10,128 10,528 -4 Ecuador 46,521 36,591 27 222,544 197,603 13 Total Gas, Oil and NGLs Sales (BOE/d) 650,211 594,270 9 Net Reserves Additions (MMBOE) 482 358 Production Replacement (%) 203 171 Finding, Development & Acquisition Costs ($/BOE) 8.75 7.95 * Note: All of the above information excludes Syncrude. 2002 financial and operating information is presented on a pro forma basis as if the merger of PanCanadian Energy Corporation and Alberta Energy Company Ltd. had occurred at the beginning of 2002 and is unaudited. Highlights ENCANA CORPORATION 3 ENCANA CORPORATION Chief Executive Officer’s Message TAKING STOCK OF WHAT MATTERS TO FELLOW SHAREHOLDERS “Our second year of HIS MARKS ENCANA’S SECOND ANNUAL REPORT TO SHAREHOLDERS operation saw a AND A SECOND YEAR OF STRONG OPERATING AND FINANCIAL RESULTS. sharpening of strategic OUR REPORT THEME THIS YEAR IS “WHAT MATTERS”. focus on assets and OBVIOUSLY RESULTS MATTER. IN 2003, YOUR COMPANY’S EARNINGS opportunities where TINCREASED 97 PERCENT TO $1.4 BILLION, EXCLUDING THE IMPACT OF TAX RATE EnCana has clear CHANGE AND FOREIGN EXCHANGE GAINS, COMPARED TO 2002 PRO FORMA competitive advantage.” RESULTS. CASH FLOW INCREASED 67 PERCENT TO $4.5 BILLION, OR $9.30 PER SHARE GWYN MORGAN DILUTED. OPERATIONALLY, ENCANA ACHIEVED 9 PERCENT GROWTH IN OIL AND NATURAL GAS SALES, SELLING 650,200 BARRELS OF OIL EQUIVALENT PER DAY AND INCREASED PROVED RESERVES BY 12 PERCENT. CLEARLY, 2003 OPERATING PERFORMANCE IS CONSISTENT WITH OUR OBJECTIVE OF DELIVERING HIGH PERFORMANCE BENCHMARK RESULTS. Underlying this performance are the cornerstones upon which we strive to build consistent per share intrinsic asset value growth, year after year. In this letter, I will concentrate on the cornerstones that we believe matter most for achieving growth and returns: A CLEAR BUSINESS PLAN focused on areas of key competitive advantage QUALITY ASSETS containing long-term, low-risk, strong-return growth opportunities MARGIN ADVANTAGE as a low-cost producer LOW-RISK PROFILE including country risk, reserve risk and operational risk 4 2003 ANNUAL REPORT GWYN MORGAN President & DISCIPLINE Chief Executive Officer in applying realistically-risked return criteria for investment and divestment FINANCIAL STRENGTH and flexibility in a range of commodity price scenarios A TRACK RECORD of performance REPUTATION for integrity and principled behavior in all we do ALIGNMENT of shareholder and employee interests Here is the essence of each one of these cornerstones at EnCana: A CLEAR BUSINESS PLAN focused on areas of key competitive advantage.