Ovintiv Inc

NYSE:OVV

Earnings Call Transcript 2018-Q3

[Operator]

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. [Operator Instructions] Please be advised that this conference call may not be recorded or rebroadcast without the express consent of Encana Corporation.

I would now like to turn the call -- conference call over to Corey Code, Vice President of Investor Relations. Please go ahead, Mr. Code.

[Corey Code, executive]

Thank you, operator, and welcome everyone to our conference call to discuss our strategic combination with Newfield and our third quarter results. This call is being webcast, and the slides are available on our website at encana.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 reports 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&A.

[Douglas Suttles, executive]

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 million to $1.5 billion for 2019.

The combination of Encana's and Newfield's assets creates America's -- North America's #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 Encana 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 $1.5 billion 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 improvement in cycle time, reduce cost and improve resource recovery to advance completions, just like we have accomplished in our other assets. This combination unlocks clear and achievable synergies in both G&A costs 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 Newfield position contains an estimated 3 billion barrels of oil equivalent of net unrisked resource in place. This large contiguous acreage position in the STACK/SCOOP encompasses the best parts of the play. The Newfield position includes approximately 360,000 net acres and 6,000 grossed -- gross risk locations.

In the third quarter, 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 in 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 STACK/SCOOP lends itself to cube development. The reservoir is thick and laterally extensive. With reservoir thickness up to 650 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 Cana Woodford. In the SCOOP, the Woodford Shale is the primary target with additional upside in the Springer. The reservoir is overpressured, which is -- which enhances well productivity. In the core of the play, we see initial well rates of 1,000 to 3,000 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 second-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 times 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 million per well or $125 million 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-grained 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 fractured 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% of the improvement will come from reduced cycle times to 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 driving. Shared services, economy of scale and the rapid transfer of learnings will drive these improvements. We see further opportunities to reduce well cost 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 million of efficiencies through reduced G&A. In total, we expect this transaction to deliver about $250 million of annual synergies, a compelling $1 billion in savings over the next 4 years. We intend to hit our projected run rate synergies in the second half of 2019. 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.

[Sherri Brillon, executive]

Thank you, Doug. The transaction is credit-positive with additional scale and production and reserves and is aligned with our leverage target. We expect that our leverage will continue to be on track with midcycle leverage targets as we expect our net debt to adjusted EBITDA to be at approximately 1.5x 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 forma debt has a well-disbursed maturity profile that has a weighted average term of about 10 years. We will also continue to have significant liquidity with access to $4 billion on our existing undrawn credit facility.

I'll turn the call back to Doug.

[Douglas Suttles, executive]

Thanks, Sherry. This acquisition aligns with Encana's core competencies and resource identification, operational excellence, capital allocation and market fundamentals. We believe these core competencies are what give 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 of scale. Our cube development approach and advanced completion designs bringing together learnings from across our diverse asset base and will add significant value to the 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 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 market 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 third quarter performance builds on our track record of consistent delivery. We expect to deliver approximately 30% year-over-year production growth and to 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 third quarter 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 fourth quarter. Our cube development approach is yielding strong results in the Permian where production was 99,000 barrels oil equivalent per day in the third quarter and is on track to average over 100,000 barrels a day in the fourth quarter. 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 and 65,000 barrels a day in the fourth quarter. We are currently producing about 55,000 barrels a day of liquids in the Montney.

The Pipestone liquids hub came on late in the third quarter, 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 third quarter 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 third quarter per unit LOE and T&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.

[Sherri Brillon, executive]

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 second quarter 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 million in free cash flow in the third quarter and expect to generate additional free cash flow in the fourth 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 1.6x at the end of the quarter. With the expected closing of our San Juan disposition by the end of the fourth quarter, we now expect to come in below our target of 1.5x 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 third quarter, liquids accounted for 47% of total production. Our relentless focus on efficiency and greater scale is driving our per unit cost down. Compared to last quarter, our per unit operating costs and our T&P 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 million lower than our original guidance. As a result, we are lowering our T&P 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 billion. This reflects $55 million of capital associated with divested assets, the San Juan and the Pipestone liquids hub. This capital would be recovered as divestiture proceeds. It also reflects higher diesel costs, steel tariffs and the 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.

[Douglas Suttles, executive]

Thanks, Sherri. We have completed a very strong third quarter, 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 in 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.

[Operator]

[Operator Instructions] Your first question comes from Greg Pardy with RBC Capital Markets.

[Greg Pardy, analyst]

Doug, what's the plan for the balance of the Newfield portfolio outside of the STACK/SCOOP?

[Douglas Suttles, executive]

Yes, 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, the -- 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 3 plays.

[Greg Pardy, analyst]

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 noncore if you could or as you say, you run them for free cash. I'm assuming both options are open on the balance.

[Douglas Suttles, executive]

Yes, Greg. Yes, I think we never like to comment on the future of the portfolio other than just say I think direction is always very clear. We're very focused and disciplined about capital allocation. And even though those other 3 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.

[Greg Pardy, analyst]

Okay, perfect. And just a follow-up for me as on the questions 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?

[Douglas Suttles, executive]

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 ripe for the way we approach development. But we're also multi-basin, but we also say it's a 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 million 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 overpressured. So we think this is absolutely ripe for what we've learned in developing across the plays. 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.

[Operator]

Your next question comes from Randy Ollenberger with BMO Capital Markets.

[Randy Ollenberger, analyst]

Doug, just building a little bit on Greg's questions I guess, and this is just kind of around how we should think about capital allocation going forward here. Do you see the SCOOP/STACK as 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?

[Douglas Suttles, executive]

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 the 2019 in conjunction with closing, which we expect to be in the first quarter. 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 one is this business will generate free cash in 2019; number two 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 significantly in 2019. But we do think it'll 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 built and partnered with people like Veresen and [indiscernible], 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.

[Randy Ollenberger, analyst]

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 you 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?

[Douglas Suttles, executive]

Yes, Greg (sic) [ Randy ], we've always been clear about this that it doesn't make sense for us to focus growth in an asset that can't achieve at least 50,000 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.

[Operator]

Your next question comes from Brian Singer with Goldman Sachs.

[Brian Singer, analyst]

Could you talk to the importance of this deal, specifically to what you're doing on the dividend and share repurchase side? Arguably legacy assets are 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 wanted you to comment on a little bit.

[Douglas Suttles, executive]

Yes, Brian, I think couple of things. One is, is we are in a business, a commodity business that 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 the -- and of course, we committed to the $400 million 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 $1.5 billion and expand the dividend. But we think we have to do that -- because we are in 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.

[Brian Singer, analyst]

Great. And then my follow-up is on the Newfield assets and then your strategy with them. We've gotten questions from investors over the years on just the pace of Newfield's 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, et cetera, to what degree will that $250 million 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?

[Douglas Suttles, executive]

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 disciplined approach to 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's just ready to, if you will, take off into the development mode, which makes it ripe, I think for many of the things that 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&A piece is very clear. We tried to outline that in one of the slides. And then on the capital cost savings, we actually think by applying some of the things we do, some of the things we do with supply chain, self-sourcing, some of the things we do with water, some of the things we do with multi-rig, multi-frac spreads on large pads, we think we can improve costs by about $1 million a well and get at that in 2019. Further upsides are going to come from other benefits from that. But those 2 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.

[Operator]

Next question comes from Josh Silverstein with Wolfe Research.

[Joshua Silverstein, analyst]

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 pointed to come in the second quarter or the third quarter of 2019. I just wanted to see if that's what you guys were still seeing based on their move towards large-scale development.

[Douglas Suttles, executive]

Well, I think it is set to take off in 2019. Exactly what quarter, a little early to say 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 in other plays, and we're -- believe we can apply those, which could create additional upside here. But it looks like '19 is the takeoff point. Exactly which quarter, we'll have to obviously work through as we work through our budget process with them.

[Joshua Silverstein, analyst]

And they were clearly doing much more heavy -- heavily towards the STACK development play relative to elsewhere in the basin. Is that how you guys think your capital allocated will be too?

[Douglas Suttles, executive]

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 overpressured oil window in the STACK. So that makes a lot of sense. 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.

[Joshua Silverstein, analyst]

Got it. And then just going back on the other opportunities that were in front of you guys, how different was the steel versus Midland transaction that might have been done at 30,000 or 40,000 per acre. It's something that have spit off cash flow -- or free cash flow a year or 2 from now. Were there other opportunities available like that? Because it seems like there sparer packages in the Midland Basin relative to this Anadarko transaction?

[Douglas Suttles, executive]

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 100,000 now. And it was right for taking off into real large-scale growth. We think the STACK and the SCOOP are at exactly that same point in time today.

[Operator]

Next question comes from Dennis Fong with Canaccord Genuity.

[Dennis Fong, analyst]

Just quickly here. In the past, you've kind of indicated that your belief of kind of 4 to 7 core assets as being kind of the "right number" of kind of optionality within the context of the 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, given the other plays that you currently have, which are I guess less -- are attracting less capital on a net basis?

[Douglas Suttles, executive]

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 I would say, today, those assets would be focused on the 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 3 of those don't have the same growth potential that the other 3 do.

[Dennis Fong, analyst]

Okay, perfect. And then just kind of carrying on from that, just in terms of from a pro forma 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 toward 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 combination [indiscernible]?

[Douglas Suttles, executive]

Yes, so I think with the announcement today, we shouldn't overlook the expanding the buyback to $1.5 billion and increasing the dividend by 25%. So this now is buyback's 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 an attractive transaction like this had to be accretive, and I've already talked about cash flow per share. And 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 the -- to make the significant expansion of the buyback program and the increase to the dividend.

[Operator]

Your next question comes from Jeffrey Campbell with Tuohy Brothers.

[Jeffrey Campbell, analyst]

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 your 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 Newfield's ongoing projects first?

[Douglas Suttles, executive]

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.

[Jeffrey Campbell, analyst]

Okay, great. And a simple question. The Graben Eagle Ford result that you announced in the press release, would this well qualify as a premium location?

[Douglas Suttles, executive]

You're talking about the Graben?

[Jeffrey Campbell, analyst]

Yes.

[Douglas Suttles, executive]

Yes, what we've talked about for a while is we -- 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 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.

[Jeffrey Campbell, analyst]

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 on the Graben.

[Douglas Suttles, executive]

Yes, Jeff. And I should point out, I mean that business in the third 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.

[Operator]

Your next question comes from Asit Sen with Bank of America Merrill Lynch.

[Asit Sen, analyst]

I have a couple of quick ones. Doug, you mentioned you've been studying this basin 4 or 5 years. Just wondering how long you have been looking at the deal? How did it come together? How competitive it was? Anything in those lines?

[Douglas Suttles, executive]

Yes, and I really probably, just best thing to do here is say the proxy would be filed shortly and all of that will come out there. But so I'd 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 as 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.

[Asit Sen, analyst]

Great. And then on the accretion comment onto 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 the 5-year basis?

[Douglas Suttles, executive]

Yes, it -- 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 the -- its high-quality liquids potential, particularly oil.

[Asit Sen, analyst]

Great. Then my -- 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? And what do you see as some of the operational risk of implementing that in the new basin?

[Douglas Suttles, executive]

Yes. It's funny, Mike McAllister, our COO, is across from me here, and he's looking quite worried because he thinks I'm probably about to set his target for 2019. We think it really is ready for this. 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 new field 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.

[Operator]

Your next question comes from Jeoffrey Lambujon with Tudor Pickering Holt.

[Jeoffrey Lambujon, analyst]

In the STACK, the industry has really pushed spacing designs quite a bit there, and it looks operators are actually starting to out space. As you look at Newfield's 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 yours?

[Douglas Suttles, executive]

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 in spacing and stacking orientation. So we think it is ripe now, after a lot of the appraisal work that's gone on 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 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.

[Jeoffrey Lambujon, analyst]

Got it. And then looking at the SCOOP, Newfield's got a pretty decent-sized 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 have kind of looked at the dealers? Is that something you see as additives to inventory over time? It would be just great to get your thoughts on additional horizons there.

[Douglas Suttles, executive]

Yes, I think it's a conservative view of inventory today there, recognizing where the land position is, where the opportunities sit. There's a reasonable amount of nonoperated 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.

[Operator]

Your next question comes from Phil Skolnick with Eight Capital.

[Philip Skolnick, analyst]

A couple 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 across the line?

[Douglas Suttles, executive]

Yes, I think I just pushed it to the proxy when it gets filed, which should be in the next couple of days. I believe the voting requirements are a majority for our shareholders and 2/3 for theirs.

[Philip Skolnick, analyst]

Okay. And the final one is do you plan to hedge any of the production once this closes?

[Douglas Suttles, executive]

Yes, Phil, we -- 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 Q3, we have a good position built for 2019. They also have a position in 2019. 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 pulled back sharply, I would expect us to pull capital back in parallel with that. But I think we have a good protection for 2019 against that sort of uncertainty.

[Operator]

Your next question comes from Bob Morris with Citi.

[Robert Morris, analyst]

Actually, I thought I'd taken myself out of the queue. You've pretty much addressed all my questions. So I'll just leave it at that.

[Operator]

You're next question comes from Bob Brackett with Bernstein Research.

[Bob Brackett, analyst]

Are you surprised by the share price reaction to this announcement?

[Douglas Suttles, executive]

I haven't -- Bob, I haven't even looked. I -- me and our board and our team and I think the Newfield team believe this is a great opportunity to create real value for shareholders, and I'm pretty convinced shareholders will realize that over time. We think this has got obvious benefits, clear synergies and fits what we're good at and completely consistent with strategy.

[Bob Brackett, analyst]

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?

[Douglas Suttles, executive]

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, 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. It's -- the play is more active today than it's ever been in the history of the ploy. 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.

[Operator]

Next question comes from John Herrlin with Societe Generale.

[John Herrlin, analyst]

Yes, most things were asked, Doug. But you've -- not wanting to disclose much more given the proxy coming out, but would you at least say whether it was a data room, the purchase?

[Douglas Suttles, executive]

Whether it was a what?

[Corey Code, executive]

Data room.

[John Herrlin, analyst]

A data room situation.

[Douglas Suttles, executive]

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.

[Operator]

[Operator Instructions] And we have a question from David Heikkinen with Heikkinen Energy.

[David Heikkinen, analyst]

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?

[Douglas Suttles, executive]

Yes, on the plan there and the -- how capital will be deployed across the portfolio and actually we'll be working that hard and as I mentioned guide coincident, we hope, with the close. So give us a little time to work through the details because I -- we're going to be optimizing, if you will, the new company here. And we would expect to improve upon the business without that -- without those assets. And 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.

[Operator]

At this time, we have completed the question-and-answer session. And we'll turn the call back to Mr. Code.

[Corey Code, executive]

Thank you, operator. That concludes our call for today.

[Operator]

This concludes today's conference call. You may now disconnect.