Internal Analysis of Encana
Internal Analysis of Encana
Introduction
The oil and gas industry in North America is currently experiencing challenges and transition stage. The increasing need for the environment-friendly and sustainable forms of energy is affecting the industry negatively as more governments and companies are encouraged to use energy with no or low carbon emission. More companies are now developing solar and wind energy and create vehicles that can rely on electricity rather than oil.
Such growing trend in the energy sector resulted to lower demand of oil and gas particularly in the North America. Many oil and gas producing countries and companies suffered to this trend. There have been massive employment lay-offs, for example, in the oil producing economies such as United Arab Emirates and Saudi Arabia. Nigerian currency fast depreciated, Venezuela’s economy fell, while there were also massive layoffs in the sector in the United States and Canada.
Deloitte’s (2015) report discussed the top issues that the oil and gas industry is currently facing in the North America. Among these include the declining oil and gas prices and changes in the demand and supply (Middle East’s oil, for example, are now aimed to be sold in Asia and Europe rather than North America).
The United States has also banned some of the Middle East countries like Iran from supplying oil. The country already sources about 90% of its oil requirement locally, an increase from 2005’s 70% (Deloitte, 2015). Japan, third largest oil consumer, is now relying more on natural gas and nuclear energy. The declining demand in the Western Europe is attributed to the recent economic crisis and growing reliance on renewable energy (Deloitte, 2015).
Other challenges of the industry include increased oil production in Iraq, deepwater shelf production, biofuels production growth, and gas to liquids expansion. Nevertheless, the industry’s drivers of growth include population growth, urbanization, motorization in Asia, growing costs of exploration, and production, OPEC policy, and dollar depreciation (Lukoil, 2015).
Encana Corporation is among the 25 key players in the oil and gas industry in the North America. Some of the other key players include Noble Energy, Energen Corporation, Pioneer Natural Resources, and EP Energy (Chang, 2015). The company’s significant oil and natural gas hedging in 2015 has helped it to survive amidst challenging business environment. In the first half of 2016, the Encana Corporation is seen to be recovering from declines in its several financial indicators. Nevertheless, the second half is yet to be seen to finally conclude whether the company was able to perform well in the sector’s transition stage. This paper will provide the internal analysis if Encana Corporation in the following areas: Resource Based View, Value Chain Analysis, Core Competencies, and Key Success Factor.
RESOURCE BASED VIEW ANALYSIS
The resource based view analysis section discusses the company’s assets and strategies that contributed to the performance of Encana Corporation. It details the performance of its tangible and intangible resources. The tangible resources discussed are financials, physical sector, and technology, while the intangible resources are the reputation, innovation, and human resource.
TANGIBLE RESOURCES
Financial Note
Encana, a leading provider of oil and gas products in North America, recently experienced financial difficulty which can be attributed to the regulations and trends supporting the renewable energy rather than oil and gas, lower product prices, fluctuating exchange rate resulting to losses, and declining demand, and hence, production of oil and gas. The company experienced a net loss and declined revenue growth in 2015.
The succeeding section will discuss the financial analysis for Encana in three periods, 2014-2016. The company, generally, has declining financial ratios which are not a good indicator in terms of profitability and liquidity. Further, the company also experienced a worsened solvency rate in 2015. Encana engaged in several divestitures in 2015. It invests on social corporate responsibility activities and sustainable production to enhance its intangible assets and to create more value to its stakeholders.
Financial Ratios
Financial ratios are important measures in analyzing the financial health of a company. Information from the North Seattle Community College (2015) stated that financial ratios can be categorized in four groups, first is the short term debt paying ability, liquidity activity ratios, ability to meet long term-debt obligation, and profitability ratios.
Profitability Ratios
Profitability ratios determine the company’s capability to generate operational profit. Two of the examples include Profit Margin Ratio, the measure of net income per dollar of sales, and Net Earnings Per Share or the measure of profit per outstanding share. Below are the computations for Profit Margin Ratio and Net Earnings Per Share (My Accounting Course, 2016).
Profit Margin Ratio = Net Income/Net Sales
Net Earnings Per Share = Net Income- Dividends on Preferred Stocks/Average Outstanding Shares
In 2014-2016, Encana had declining and going negative Profit Margin Ratio and Net Earnings Per Share signaling lower capability to generate operating profit (Encana, 2015 and 2016). The declining trend on profitability is attributed to the lower cost of oil and natural gas, lower production and demand, and stiffer competition in the industry particularly in price terms. Its cost-cutting measures including employee reduction, shelving products, reducing capital expenditure and dividends were not enough to pull- up or achieve profits specifically in 2015 and 2016 (Hussain, 2015).
Liquidity Ratios
Liquidity ratios enable the company determine if it can pay short or long term obligations while profitability ratio. Two examples of Liquidity Ratios Are Quick Ratio or the company to pay liabilities through its quick assets, and Current Ratio, or the company’s ability to pay short term liabilities through its current assets. Below are the computations for Quick Ratio and Current Ratio (My Accounting Course, 2016).
Quick Ratio = Cash+ Cash Equivalents + Short-term investments + current receivables / current liabilities
Current Ratio = Current Assets/ Current Liabilities
In 2014-2016, Encana had declining Quick Ratio and Current Ratio signaling lower capability to pay long term and short term liabilities (Encana, 2015 and 2016). Such is attributed to its negative net income which reduces its cash flow. The series of divestitures in 2015 helped the company obtained liquidity, but has also limited its sources of revenues.
Solvency Ratios
Solvency Ratios are used to measure the company’s indefinite ability to sustain operation. Examples of these are Debt to Equity Ratio, comparison of total debt and total equity, and Debt Ratio, percentage of liabilities to total assets. Below are the computations for Debt to Equity Ratio and Debt Ratio (My Accounting Course, 2016).
Debt to Equity Ratio = Total Liabilities/Total Equity
Debt Ratio = Total Liabilities/ Total Assets
In 2014-2016, Encana had an increased Debt to Equity Ratio and Debt Ratio signaling positive solvency of the company (Encana, 2015 and 2016). Encana was able to maintain a positive cash flow amidst challenging times. With property strategy, technological development, tapping of new markets, production of sustainable products, and maximizing operational efficiency, the company will be able to sustain operation and may even recover as the industry looks for ways to achieve significant growth.
Physical Sector
Encana’s physical assets declined by 45 percent in 2015 and reached $9.6 billion. In 2014, the company’s physical assets were worth $18 billion in 2014. Encana, however, is seemingly recovering in the first half of 2016 having registered $8.7 billion physical assets (Encana, 2015 and 2016).
The company engaged in divestiture of properties in June 2015 including the sale of certain assets in Wheatland, Alberta and the sale of certain natural gas gathering compression assets in Montney in northeastern British Columbia, and the Encana Palace Office building in Calgary (Encana, 2016). The sales of the said assets caused a divestiture worth $941 million (Encana, 2016).
Encana’s declining physical asset can be a short-term solution to minimize costs. If the company will continue to focus on the two core products, there is a large potential that Encana’s divestiture will result to limited, if not dwindling, growth for the company. As such, it is advisable that funds obtained from divestiture should be reinvested in the forms of energy that are clearly has huge growth opportunities, and that includes purchasing properties and assets that support the growth products in the energy sector.
Technology
In a thrust to provide more environment-friendly oil and natural gas products, the company has developed and purchased technologies. The two includes the new Natural Gas Dehydration Technology that will help reduce emission and energy consumption of its products if compared to other traditional gas (Encana, 2016) and the use of PROSERNAT technology in 2015 for the licenses of eight new IFPEXOL for gas dehydration and hydrocarbon and dew point control (Hydrocarbon Engineering, 2015).
The company’s adaption of technology signals its enthusiasm and financial capability to invest on something that will help reduce the risk of sales loss. Encana is in best position to compete with the other oil and gas producers due to the trend on sustainability. Further, more innovations can make the company become more competitive even in the age of the renewable resources as further research and low carbon emissions can make oil and gas products more fit in the extensive sustainability trend in the future.
Encana is also advised to invest on technology researches relating to oil and natural gas. It is also recommended to explore other technologies that can enable them efficiently reinvest in the renewable energy as part of possible diversification strategy to minimize or even offset financial losses.
In line with the oil and gas technology, there are also new technologies nowadays that company can obtain to help lower the production cost. Oil and gas companies are now exploring the possibility of having the technology that will refract wells and are more capable of diversion techniques (Saider and Ailworth, 2015).
INTANGIBLE RESOURCES
Reputation
The brand and the corporate image is the intangible asset of the company. Although Encana has limited marketing activities in the past few years to sell its products, it highly positioned itself on sustainability to help enhance consumers’ and businesses’ perception about the company especially that it is in the oil and gas business. In 2015, the company’s Chief Executive Officer emphasized that Encana is run as a responsible and sustainable company (Encana, 2015). Its management is more than the requirements of efficiency.
Although the company has been secured on its government entities client bases, Encana need not to be complacent in its reputation building marketing activities. Such means that the company needs to invest more on various marketing activities that can help improve the image of its products, the brand, and the company. Such marketing activities should also help Encana achieve more sales across the globe. Among the potential effective marketing activities include multimedia advertisements, government and industry meetings, and digital marketing.
Another thing to note, Encana is also suffering from some reputation-related issues such as labor –related lawsuits which are most probably causes by its cost reduction measures. In July 2016, about six oil and gas workers sued Encana Corporation for allegedly treating and classifying them as contract workers. The company allegedly cheats on the workers’ overtime pays and benefits. The case filed in the US Department of Labor is ongoing
Innovation
Encana highly considers responsibility, and it addresses environment issues through multifaceted strategies such as transparent reporting, stakeholder engagement, doing the industry’s best practices, and innovative operating procedures. Some of the specific strategic and innovative implementation about sustainability include adapting water management approach to the unique condition of each resource play, exploring options to reduce methane emission, continued improvement in personal safety, and reduce emission intensity and improve energy efficiency (Encana, 2015).
Other innovative measures that the company applied particularly in 2015include reduction of the rig time for oil sourcing from well to 10.7 days from 15 days, better underground monitoring, and more efficient rig operation (Chapa, 2015). It also applied financial management innovation such as trimming down its capital expenditure by $700 million. While such innovations are sound, the measures were not enough to provide positive profit for the company in 2015, but such are expected to have positive impact to its financial condition in the next few years.
Human Resource
Encana currently has about 2,500 employees. The series of divestitures in 2015 caused a huge reduction in its workforces (Encana, 2015). In February 2015, Encana’s Chief Executive Officer Doug Suttles said that the oil industry experienced the worst massive lay-off in 2015 (Bickis, 2016). The company started year 2015 with 3,129 employees and ended it with 2,500 staff (Bickis, 2016).
Suttles mentioned that the company tried its best creative means to keep employees by deploying some of the staff to its contractors. However, the low demand in oil has drove companies to cut cost and among the measure is to reduce the number of employees. Aside from employee reduction, Encana also reduced the amount and quality of benefits it provides to its employees (Encana, 2015).
VALUE CHAIN ANALYSIS
Encana is focused on creating sustainable, long-term shareholder value. According to its 2015 Annual report, it ensures that the company builds sustainable value for its shareholders while complying with responsible development, corporate governance, and ethics in an utmost standard (Encana, 2016).
It invested majority of its capital in high-value opportunities in the four cores assets. These assets exceed fourth quarter production targets with a positive return. The value creation is also achieved through strong environmental, social and social and governance that contribute to economic growth (Encana, 2016).
Primary
The table provided below shows different aspect of primary and secondary value chain analysis. Areas include inbound logistics, operations, outbound logistics, marketing and sales, and service. As a summary, Encana sources its oil and natural gas from Canada and sell it to the United States and other countries (Encana, 2015).
It also has production facilities and properties in the United States. It recently acquired properties with high oil and gas production potential in Canada and the United States. It has export capabilities and sells products through government entities. Its marketing activities are press conferences, trade meetings, and corporate social responsibility activities.
Secondary
For secondary value chain analysis, the company generally administers the company based on cost analysis. It seeks the integrated contribution and role of its stakeholders to have better corporate performance. It develops technology that will reduce carbon emission, and it applied cost cutting strategies as a part of its human resource management in difficult times particularly in 2015. Among the cost cutting strategies in human resource are reduction of employees and amount and quality of benefits. It purchases oil-rich properties (please see table at the bottom for more details on secondary value chain analysis).
CORE COMPETENCIES ANALYSIS
Acquisition of Physical Assets
Encana has sufficient cash flow to acquire properties in 2013-2014, but such changed during 2015 when the company engaged in several divestitures. It also has the capacity to purchase and develop properties with high liquid and oil and gas potentials. It has the capacity to produce natural gas and oil, support the growth industry while minding the environment concerns in the local and global arena.
The company’s ability to acquire physical assets can help it exit in the challenges of the oil and gas sector if it will consider investing in the physical assets of the other energy forms that provide high profit potential. It can also incorporate acquisition of physical assets with expansion of business and abilities to manage cross-product business segments within one sector. Applying such strategy can lead to profitable returns in the next coming years.
Ability to develop and acquire technologies
The company has the ability to develop and purchase technologies that will support the sustainability goals of the company and the concerned stakeholders. At the same time, it can position itself as a responsible and sustainable company by adhering to producing energy products that lower carbon emission and achieve energy efficiency.
Encana has a vast coverage in North America with capability to export in several countries around the globe. Its sustainable positioning as supported by its technologies can help it tap countries, government, and niches that welcome energy products with conservative carbon emissions.
The company can also include acquisition and development of technologies that can enable it to diversify products and become competent in the renewable energies. Solar energy sector, for example, is quite young. Investing in the related technologies to support possible product expansion can help the company increase market share and presence in the energy sector.
Oil production and carbon emission reduction capabilities
The company has the ability to produce oil and gas that has lower carbon emissions. Such can be a long-term advantage given the trend on environment-friendliness. However, such core competency should be incorporated with effective marketing strategies. Encana needs to increase consumers’, governments’, and trade industries’ awareness of its sustainability capabilities. Such can be done through multimedia advertisements, corporate social responsibility activities, and more frequent press conferences.
Encana’s oil and natural gas products use the primary value chain of inbound logistics, operations, outbound logistics, and marketing and sales. The products also use the secondary value chain such as procurement; technology development, human resource development, and general administration (please see tables at the bottom for more details).
KEY SUCCESS FACTORS
Among longest existing key players in the sector
Encana takes the advantage of being among the energy companies with oldest existence. Hence, its stability and operational practices are already tested. With such long-time and experienced management practices, the company is able to maintain solvency even during the difficult times in 2015, lower oil demand, and lower prices of oil and gas. The company continues to enjoy good solvency data until 2016.
In addition, its long operation also means that it has already established good business relationships with its client base. There is a need for the company to maintain its business relationships and use highly effective strategies to tap new markets and build more client base.
Willingness and capabilities to adapt to new technologies
The other success factors are the company’s willingness to adapt to technologies that enable it to position itself as a responsible and sustainable company. In times of stronger demand on renewable energy, such positioning highly helps the company survive in the most difficult business environment.
The willingness and capability to adapt to new technologies has also set Encana apart from other several players in the industry that suffered from larger loss, which is also because of their lower preparedness as reflected in their minimal hedging on their products. Encana’s openness to new technologies for operational efficiencies and for producing better products will make it become more competitive in the future.
Capacity to reduce operational costs
Encana’s capacity to reduce production and costs as the demand for oil and natural gas lowers enabled it to sustain a higher cash flow in 2015 amidst business challenges. Such enable it to recover easier in 2016 and is expected to reap positive revenue and net income by the end of the year.
The challenges of the oil and gas industry are pressuring several companies to innovate and find ways to sustain revenue amidst general trend on using more environment-friendly energy products. The key is to keep updated on the regulations per country as well as finding more specialized niche/ industry/ and countries that are more inclined to use oil and gas products. Further, continuous innovation can help the industry find ways how to make the oil and gas products as sustainable as the other energy products.
In line with this, there is a need for the company to coordinate with science researches, marketing companies, as well as government entities. It is also advisable to for the company to tap mainly industries aside from the governments as the United States recently created an agreement for all countries to reduce carbon emissions. Other ways such as producing other products that are made of oil and gas can be potential products for growth.
CONCLUSION
Like several oil and gas producing companies, Encana Corporation was not spared from the several challenges confronting the industry across the globe. Regulations and increasing oil self-sufficiency of the countries in the Middle East, the United States, and soon the South East Asia totally bring down the price of oil and natural gas as supply becomes significantly larger than demand. As such there is a need for Encana Corporation to innovate in many ways, not only in obtaining operational efficiencies but also in achieving higher sales.
Some of the possible efforts that can be done to address oil and gas supply surplus is the creation of products coming from such raw materials, and producing more technologies that can make the products to have a very minimal carbon emission. Integration of the oil and natural gas to other energy forms can be another innovative ways to make use more of the oil and natural gas products.
Management-wise, the company made sound and significant decisions to limit losses and to sustain cash flows. However, there are insufficiencies that made Encana to miss more growth opportunities. Among these are the opportunity to diversify after it engaged in divestiture, tapping of new markets, and creating new growth products out of the oil and natural gas.
It is natural to be in depressed state if the company is currently facing a challenging business environment. However, strong leadership, innovative minds, and sharpness in the current trends and developments in the industry will always provide the company’s the way out of the challenges and will direct it to the opportunities that can provide large growth in the future.
* Check marks by V, R, I or O indicate the Value, Rarity, Inimitability and Non-Substitutability of an advantage in the market place.
References
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