Ovintiv Inc

NYSE:OVV

Earnings Call Transcript 2018-Q4

[Operator]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Encana Corporation's Fourth Quarter 2018 Year-end Results Conference Call. [Operator Instructions] For members of the media attending in a listen-only mode today, you may quote statements made by any of the Encana representatives. However, members of the media who wish to quote others who are speaking on this call today, we advise you contact those individuals directly to obtain their consent. Please be advised that this conference call may not be recorded or rebroadcast without the expressed consent of Encana Corporation.

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

[Corey Code, executive]

Thank you, operator, and welcome everyone to our 2019 guidance and 2018 results conference call. 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. Encana prepares its financial statements in accordance with U.S. GAAP and reports its financial results in U.S. dollars. So references to dollars means U.S. dollars and the reserves, resources and production information are after royalties unless otherwise noted. In addition, Encana will be filing its Form 10-K later today. Following our prepared remarks this morning, members of our executive leadership team will be available to take your questions. As always, please limit your time during Q&A to one question and one follow-up.

And before turning to call over to our President and CEO, Doug Suttles, let me introduce Steve Campbell as the new Head of Investor Relations and Communications. Many of you likely know him already and he looks forward to working with you. Over to you, Doug.

[Douglas Suttles, executive]

Well, thanks, Corey, and good morning, everyone, and thank you for joining us. Before I start, I do want to thank Corey for serving as our Head of IR and actually to welcome Steve Campbell to Encana as he picks up that role. Corey will be our Head of Strategy. Both Corey and Steve will be reporting directly to me.

By now, I hope you've had a chance to review our news release with 2018 financial and operating results as well as our 2019 outlook. But before getting into today's slides, it's important to understand how we performed against our key objectives in 2018.

Our results are a testament to how we have transformed our company over the last 5 years. In 2018, we generated free cash flow, strengthened the balance sheet, delivered liquids growth and returned cash to shareholders. Encana has a sustainable model, all of the building blocks of a premier E&P company. First, we have scale. Our multi-basin liquids-rich portfolio is generating liquids growth and free cash. At year-end 2018, our pro forma approved reserves were 2 billion barrels of which 55% were liquids. Today we are one of the largest liquids producers in North America with inventory debt to drive growth and cash flow for years to come.

Second, we are disciplined in our capital allocation process. For 2019, we will direct more than 75% of our capital budget to our core liquids plays. We call these our Core 3; the Permian, Montney and our newest basin the Anadarko. Next, we have a unique combination of discipline and innovation to drive efficiency into everything we do. We are also fulfilling our commitment to return cash to shareholders through our share buyback program and our expanded dividend.

And lastly, our plan is underpinned by a strong balance sheet. Over the last few weeks, the majority of our large cap peers have reported results and issued their outlooks. Most companies have pledged to moderate growth, find a path forward to live within cash flow and eventually return cash to shareholders. These stories all sound pretty good. But there is one difference. Encana is doing all of these things today. Our track record is sound and we are confident that our plan will create value for our shareholders.

Our industry is rapidly reinventing itself today. Gone are the days where production growth and large cash flow outspends were rewarded by the market. Growth should be a product of making the right capital investment choices and our industry is being forced to compete for capital today across all industries. We must be able to manage through the volatility and the inevitable commodity price cycles. Encana can. We have all the key building blocks required of a premium company. Let me share a little more in each of these before handing the call to Mike McAllister to cover some of our operating results.

Scale across a multi-basin portfolio is a distinct advantage. Our strategic combination with Newfield provides us with a strong position and a third high-quality liquids play. As we have visited with a great deal of our shareholders over the last 3 months, our rationale for the deal has resonated. It's pretty simple. We've proven our ability to generate top tier margins and returns in unconventional plays and to be a leading operator in every play we're in. Encana's track record in the Montney and Permian can be instantly applied to the Anadarko. Unconventional plays today all have similar challenges and our proven practices are a key competitive advantage. Time and again, Encana has applied lessons learned faster than its peers. We anticipate both risks and opportunities. Our unique combination of innovation and discipline unlocks value for today and tomorrow.

Cube development works. We pioneered the surface benefits in the Duvernay with multiple rigs and pressure pumping crews on a single pad, lowering cost and reducing cycle times. In the Eagle Ford, we enhanced well performance with high intensity completions. And in the Permian, we demonstrated the value of developing in 3D, optimizing both spacing and stacking. We are now applying these learnings to the Anadarko.

Supply chain management keeps cost low, ensures we get high-quality services and have access to the services we need when we need them. We were an early leader in self-sorting critical products like sand and chemicals. In the Montney and Permian, we have lowered our D&C cost by 25% since 2015. Our methods work and we have already seen early and material gains in our newest area, the Anadarko Basin. Mike and his team are confident in their ability to lower well cost in the Anadarko by at least $1 million by mid-year.

Getting our wells completed and online is just the first step. The next is market access. When looking at realized prices in the fourth quarter of 2018 including the benefit of basins positions, the realized oil price in the Permian -- our realized oil price in the Permian was 101% of WTI and our Canadian gas sold for 87% of NYMEX, which is more than double the AECO price. Our proactive steps to ensure access to premium markets added value to the bottom line.

Our 2019 capital budget is $2.7 billion to $2.9 billion, about 20% lower than 2018 and significantly less than Encana and Newfield would have likely spent independently. The Core 3 liquids plays will get over 75% of the capital. You'll see the collective assets have grown liquids at a 30% CAGR since 2016.

For 2019, we expect to go Core 3 liquids productions by approximately 15%, representing production adds of 20,000 to 30,000 barrels per day. That's the size of today's small and mid-cap companies. Scale and quality matter and Encana's business model is sustainable. We have created the right mix of profitable liquids growth and free cash that can be returned to owners.

Our portfolio beyond the Core 3 assets, primarily the Eagle Ford, Duvernay and Williston, are high quality. They have high margins and returns, but their role in the portfolio is clear. Given their limited size, we run these assets to maximize efficiencies to generate sustainable free cash flow. Given this, the shape of their capital programs will largely be front-end loaded.

I won't spend too much time on this slide as we've talked about it before, but it's the framework for our disciplined approach to capital allocation. Our first priority is a strong balance sheet. Over the last few years, we've successfully sold $13 billion of mostly gas assets, repositioned the portfolio to liquids and strengthened our balance sheet. We don't intend to move backwards.

Priorities 2 through 5 explain how we think about the use of available future cash flow. We are committed to our dividend and we'd like to increase it as sustainable cash flows grow. We will be opportunistic in buying back our shares, which today we see as great value. Our balance sheet must remain strong and growth with investments will be liquids focused and focused on strong returns. As oil prices rise and our cash flow increases, this framework will largely guide our capital allocation choices.

When you look at how Encana stacks up today, we provide one of the most intriguing value propositions in the market. We are not promising to get to free cash flow at some point in the future, we are there today for the second year in a row and have a multi-basin portfolio that supports a sustainable business model without geographic or commodity concentration risk.

This chart depicts the disconnect in Encana's valuation. Among a solid list of peers, we have the second highest estimated free cash yield in the lowest trading multiple. Our margins are strong, our growth rates are competitive and we are generating and returning cash to owners now. Our $1.25 billion buyback further returns cash to owners.

Our 2019 plan reflects the quality of the underlying business. A strong balance sheet, a deep high quality asset based in or focused in 3 of North America's top place, a track record of delivery underpinned by a combination of innovation and discipline. In a business that can grow and generate free cash flow in the low to mid 50s oil price, this is not a promise but where we are now.

The previous slide paints a compelling valuation proposition for why we want to buyback our equity today. This slide shows our commitment to return cash to our shareholders. Our company is remarkably different today. As I said earlier, we sold approximately $13 billion of natural gas assets. We transformed our pre-reserve and production base to high margin liquids. We acquired quality assets and demonstrated our ability to make them better through our proven development and commercial practices that are transferable across plays. These strategic steps have built a business which can grow and return cash to shareholders. For the 2018-2019 period, we estimate that we will return a cumulative $1.7 billion to our shareholders.

Since 2013, we worked hard to improve our financial strength. Long-term debt was reduced by about $3 billion and long-term commitments by $4 billion. We now have more than $5 billion of liquidity between our undrawn revolver and our cash on hand.

Recent discussions with the rating agencies have been encouraging. Our multi-basin portfolio reduces concentration risks. Our production and reserve bases are substantial and growing. Our coverage ratios are in our target range. Our recent upgrade by Fitch to BBB shows the agencies are taking notice of our business strategy and solid track record of execution over the last 5 years.

When we announced our strategic combination with Newfield last November, we identified $250 million in annual synergies split evenly between G&A expenses and Anadarko well cost. We moved rapidly to integrate Newfield with Encana. 8 days, once again, 8 days after closing, we completed reorganizing the combined company. We can already report that the majority of the G&A savings have been realized through the elimination of duplicative roles and the streamlining of the total combined company.

In total, we reduced the executive and senior managerial roles by 35%, in total positions by 15%. The senior team of the combined company today is smaller than Encana senior team was before the merger. These benefits will begin to show up in our 2Q results. Mike will cover in a few minutes, the well cost savings.

The key elements of our 2019 plan are summarized on this table. We will soon be commencing our $1.25 billion, and I'll stress U.S. dollar, share buyback program and our dividend to common shareholders was increased by 25%. In the table, we show Encana and Newfield on a pro forma basis for 2018 with a comparison to our 2019 guidance. Notice that capital investments are down nearly 20% or $600 million and our liquids production is up 20,000 barrels per day at the midpoint of guidance. We have included some additional modeling assumptions on our website that will help you understand reportable results post the closing of the Newfield transaction.

In 2019, we expect that more than half of our production will be liquids. Our Core 3 will grow liquids by an estimated 15% benefit from lower cost and generate free cash flow.

I'll now turn the call over to Mike McAllister, our Chief Operating Officer, to give you some highlights from our Core 3 liquids plays.

[Michael McAllister, executive]

Good morning, everyone. Over the next few minutes, I'll give you an update on the significant operational progress we are making in our 3 core liquids plays. But first, let me share a little context on how we approach operations.

As Doug mentioned in his opening remarks, scale is critical today. The scope of work we have with service providers across multiple basins allows us to control job quality, safety and negotiate favorable service agreements. Resource plays are all about creating incremental efficiencies at every step to enhance margins.

Second, we're able to apply our best practices across multiple basins. We're rapidly applying our lessons learned in cube development into the Anadarko basin today. We are very encouraged by some of the early wins we're seeing in Oklahoma.

Third, all of these unconventional liquids plays are more alike than different. Our skill sets and targeting specific intervals, properly spacing wells within the cube and effectively stimulating the rock can be applied across all of our plays. Operational gains in one basin can rapidly be applied to another. The rocks don't know their county, state or country boundaries.

Since the day we announced our combination with Newfield, we have been integrating our teams and working to identify ways to improve returns. Most of our activity this year will be in the stack. We now control a large contiguous acreage position that is prime for rapid application of Encana's proven practices. Doug and I were just in the Anadarko earlier this week. We both left very encouraged about the direction of this play and our ability to impact operations. We're confident we can reduce well costs by at least $1 million. With just 2 weeks since the close of the transaction, we have already re-negotiated key service contracts and moved to self-source in basin sand. This alone reduces costs by $350,000 per well.

In addition, we see ways to increase pump rate efficiencies by incenting service contractors with performance-based contracts like we do in the Permian and applying supply chain logistics to reduce cycle times. We expect to fully achieve our estimated savings in the second half of the year and are targeting well cost of about $6.9 million. Lower well costs will have a significant impact on returns. We estimate that a $1 million reduction in well cost will improve returns by 30% and make our Anadarko economics competitive with any unconventional play in North America.

We entered 2019 with high activity levels inherited from Newfield. As we level load the program and shift rigs to cube development, we expect about 2/3 of our Anadarko basin capital will be spent in the first half the year, our first Encana cube, and the stack will be spud early in the second quarter. In the Anadarko, we expect to place about 100 net wells on production this year. Current production is about 140,000 BOE per day.

In the Permian, we've been improving our practices since 2014. This has been a tremendous area of growth for us where production has more than tripled to over 100,000 BOE per day. Encana is leading the way in the Permian after drilling more than 500 wells and driving per well cost down by 20%. Our cost advantages stem from all areas, from decreasing drilling completion times, optimize completions, the application of low cost water management solutions, and self-sourcing key consumables like sand and chemicals.

Our well productivity continues to improve. As an example, we brought on a new 7-well pad in Martin County that is outperforming our type curve by about 20% with an average IP90 of 1050 BOE per day, including 800 barrels per day of oil. Looking into 2019, we expect to complete about 150 net wells in the Permian. About 75% of those wells will be drilled in Midland, Martin and Upton.

Our liquids growth in Montney is impressive. Since 2015, we've built 275 net wells and grew liquids volumes by nearly 350%. The self-funded development generates free cash flow at today's commodity prices. We've successfully converted this legacy dry gas play into a core growth liquids play. Encana's core competencies have dramatically improved returns in the Montney. Since 2015, we've reduced D&C costs by over 30%. For 2019, we expect completed well cost to be about $4.3 million. While results continue to impress with the average fourth quarter well producing greater than 500 barrels per day of liquids through its first 90 days of production. For 2019, we expect to place about 75 net wells on production.

In Western Canada, basis differentials today are wide. We recognized this several years ago and created substantial natural gas production through a combination of physical out-of-basin transportation arrangements and basis hedges of approximately 1 BCF per day. However, beyond that level, our incremental gas sales do not generate a lot of cash flow. This is another proof point of why we believe a multi-basin portfolio is a key advantage for our owners. We can quickly reallocate capital to improve our plan. We have a proven track record of delivering.

I will now turn the call back to Doug.

[Douglas Suttles, executive]

Thanks, Mike. Before taking your questions, let me take a moment to close with a few key takeaways. 2018 was a very good year for Encana. We delivered on our promises and returned cash to shareholders, met our guidance targets and further strengthened our balance sheet.

We intend to deliver again in 2019. Encana has created a sustainable business with all of the building blocks of a premium company. We have scale, disciplined capital allocation based on our Core 3 and a track record of giving cash back to our owners. Our model allows us to execute across the commodity price cycles. Simply stated, others are trying to navigate to where we are today.

That concludes our prepared remarks and now we would be happy to take your questions.

[Operator]

[Operator instructions] Your first question comes from Gabe Daoud with Cowen.

[Gabriel Daoud, analyst]

Doug, maybe just starting with portfolio rationalization, it's obviously been a big part of the story over the past several years, like you hit on. So can you maybe just talk about the portfolio today, obviously spending capital on just 3 core areas? So are you getting in balance with some of the non-core assets today and really just try and get a sense of we could see Encana perhaps divest something this year to further enhance capital return to shareholders?

[Douglas Suttles, executive]

Yes, Gabe. Thanks for the question. And of course partly you probably know my answer already, but if you look at -- you think about those assets we sold over the last 5 years and compare those to essentially these 3 other assets today, things like the Eagle Ford and Williston which are very high quality assets, Duvernay is in the same bucket, they have high margins, they generate high returns, but obviously they don't have the scale of our Core 3. So we are very clear on how we are going to manage those assets. They are great free cash generators for the company. So our goal is to maximize the efficiency. We're reducing capital to maximize sustainable free cash flow. How the portfolio evolves over time, I think we're really clear that just because of the scale, the business in the future will largely be based on that Core 3, but as you know, we never really talk about things like divestments until we actually do something.

[Gabriel Daoud, analyst]

Yes, understood, Doug. And I guess just as a follow up in the Anadarko basin, could you just talk a little bit about the rig allocation across the STACK and the SCOOP, and then I guess in the STACK, can you talk a little bit about spacing and completion designs with the first couple of cubes here in 2Q?

[Douglas Suttles, executive]

Yes, I will make a couple of comments and hand it back to Mike. But largely the capital programs focused in the STACK this year. Mike will probably talk about the shape because we are -- the rig count is relatively high right now. We are in the process of bringing it down. But I want to share a story for you guys. Mike mentioned that he and I were out in the field in the Anadarko on Monday and Tuesday. Man, it was one of the best days I've had in a long time. That's a pumped up group of people that are really excited by this combination. But to show you how fast we are moving, on Monday of this week which is less than 2 weeks after we closed this deal, we set a new record for the number of barrels pumped in a day. We already have 2 frac spreads pumping self-source sand and chemicals saving us over $350,000 a well. And we have started to make some changes to well design. We've already pumped our first stages at over 100 barrels a minute, which is part of our high-intensity completion design. And obviously the point I am trying to make here is, this is not something that's coming in 2020 or 2021, this is something that is happening in February. But Mike, maybe you have a few other comments.

[Michael McAllister, executive]

Yes, you bet, Doug. Yes, just from a rig count standpoint, currently we have 10 rigs running in the basin. That will be going down to 4 here over the course of Q2. As Doug mentioned, most of the rigs are in the STACK and we've been moving very rapidly to implementing our logistics and completion designs. In fact, we worked a couple of pads today to actually incorporate in-basin sand and sandboxes and seen significant efficiencies as a result of that. With respect to spacing, we are looking as we look out here forward into Q2. We are probably looking at the 6-8 wells per section spacing and we'll be testing that and see how that works as we implement our completion design, new completion designs I should say.

[Douglas Suttles, executive]

Yes, I probably just to add one comment. If you remember, when we announced this transaction and talked about it, we said our focus was really on taking cost out at least $1 million a well. We are well on the way to having that accomplished. And that we were using what we believed was proven spacing in the play and actually the type curve that Newfield was delivering. So spacing or type curve improvements are all upsides to the deal because we based the foundation is taking cost out which we are very confident we are going to do.

[Operator]

Your next question comes from Greg Pardy with RBC Capital Markets.

[Greg Pardy, analyst]

Just one for me. I mean, significant proven reserve growth this year around just on an SEC basis, I understand really not much impact from economic factors. So is there any color you can provide around that as to which areas were more prevalent than others?

[Douglas Suttles, executive]

Yes, Greg, I am glad you hit on one thing. It really wasn't anything to do with price. Really it was driven by 2 things. As you know, as we move the portfolio to focus on essentially the Permian and Montney in the couple of years and the way the booking rules worked, basically the technical certainties moved to the point now where we are able to book those barrels. That's the single biggest driver. And the other piece that has impacted this year is, as you know, we didn't have a lot of A&D last year, which we had had in the previous years, which impacted reserves. But I think the reserves are now really reflecting the portfolio we have today. And I think as we mentioned on the call, the reserve number is now 2 billion BOEs, over half of which are liquids.

[Greg Pardy, analyst]

Okay. And then just unrelated follow-up, but just to come back to the STACK for a second. The $200 million spent just from Newfield, I think you've semi-addressed it anyway that the program was going to front-end loaded. But is there just any context you can put around that?

[Douglas Suttles, executive]

Well and I think this is partly the benefits of bringing these 2 companies together. I think they were pursuing a plan which if they were independent is the one they would have done, where what we look at it is as we balance growth with free cash generation and more level loaded. So we probably, if we had been running it in January, we would not have been running 10 rigs, it would have been at a lower level. So we are bringing it down to that sustainable level which balances growth and free cash generation.

[Operator]

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

[Asit Sen, analyst]

I have a 2 quick ones. One on STACK and the other on Permian. So on STACK, just going to spacing and stacking work, Mike, could you tell us a little bit about the target zones, target intervals? And when you see evolution of cube in STACK, how do you see that evolving relative to where you are in the Permian?

[Michael McAllister, executive]

Sure, Asit. Thanks very much for the question. Yes, in the Anadarko, we are really focusing right now on the Meramec. Upper and lower Meramec will be where our focus will be initially and then looking down into the Woodford as we move on. But the core will be on the Meramec for right now. And sorry, I didn't catch the second question on the Permian, if you could just repeat that?

[Asit Sen, analyst]

On evolution of the cube style in Anadarko relative to how you progressed in the Permian? How do you see that evolving?

[Michael McAllister, executive]

Well, we've had tremendous learnings in the Permian as you can really point to our results. And so we are benefiting from not only the well spacing and stacking understandings and type curve development, but we'll also be learning from is the cube development and the on surface cost savings that are going to be applied as well. So it's I think we'll be able to accelerate our learnings and I think we've proven that in the first week of operations.

[Douglas Suttles, executive]

Yes, just to add a couple things and the great thing is we get to see this in action earlier this week. But the cube model has a number of key components to it. Part of them are all on the surface, which is about maximizing efficiencies, keeping capital costs low. So it's everything from how we design the facilities to how we use multi-rigs and multi-frac spreads and get the savings and the cycle time benefits of that to obviously thinking about 3D and the subsurface because wells, the parent child relationship is not just laterally, it's also vertically. And as Mike said, the nice thing is we've been now doing this for 4 years in a number of plays. We're out in the field, we have a great mix now of heritage Encana people with heritage Newfield people in the team. So everything from construction to superintendents, bringing our latest thinking on how you build a well pad to mixing our drilling in completions, engineers and superintendents into that group. And what that has allowed us to do is literally a few days after closing, to start to make a shift in bring those learnings to bear. So I think we'll see the first full cube done in early 2Q. And of course start to have well results because you guys know, we don't talk about IP24, it's not even sure what they mean. We like to talk about IP30s and IP90s. So we'll wait until we have that kind of data to talk about whether and how the cube development approach is adding benefits to the well performance.

[Asit Sen, analyst]

I appreciate the color, Doug. And then on Permian, the full rig program, could you talk a little bit about the completion cadence this year? And what would it take conceptually for you to add or drop a rig in the Permian? And finally, any thoughts on the lateral length of 8500 feet looks like average for this year. What do you think your most -- were optimal EUR or it's poised to move higher?

[Douglas Suttles, executive]

Yes, I'll just pick up the piece about adding or dropping a rig and let Mike cover the rest. I mean, first of all, I think it's pretty unlikely there's much change to our capital program. We feel good about the balance we've achieved between getting growth right and actually generating free cash. So for instance, if prices were stronger, I wouldn't envision us having any real material movement to the program. The nice thing is we spent a lot of time on supply chain management. We design our contracts to give us a lot of flexibility, to flex our programs both up or down. And a good example of that, we're already now using some of the key suppliers we've used in the Permian in the Anadarko and are leveraging contracts across the 2 plays. One plays we've already done that is with sand and we probably will be doing it in other areas very soon as well. But Mike, maybe a few other comments?

[Michael McAllister, executive]

Yes. With respect to the cadence on completions, we have 3 spreads running right now in the Permian. We'll be flexing down to 2 and between 2 and 3 spreads here through the year as the pad drilling dictates. And just to add more color with Permian, Eagle Ford and now the Anadarko, gives us tremendous leverage to start looking at moving services across those 3 plays, realizing additional efficiencies that we actually didn't -- we wouldn't have seen in the pre-merger company.

[Douglas Suttles, executive]

Yes. And underneath all that, just last thing I'd add is, and we're trying to convey this in Mike's comments about the 3 Core, we're really trying to get to a pretty steady state program in all 3 plays because what that allows us to do is maximize efficiency. And then in the other assets, we're actually -- to get efficiency there because those are smaller programs, what we tend to have to do is concentrate the activity in a smaller part of the year. A great example of that would be somewhere like the Eagle Ford where if we're going to run a one rig program for the year, it's a lot more efficient to run 2 rigs for 6 months, then one rig for 12 because we are extremely focused on efficiency. It guides us. It's how you generate returns. It's how you actually maximize capital efficiency and it's actually how you expand margins.

[Operator]

Your next question comes from Brian Singer with Goldman Sachs.

[Brian Singer, analyst]

One short-term question and one long-term question. On the short term, in the Anadarko basin, it looks like you're planning to complete more wells than you are planning to drill. Usually when switching to cube strategy, I think it's sometimes the reverse initially. Is that just a function of reducing that rig count from the highs at the beginning of the year over the course of the year? And can you just talk about the impact that the completion has and the timing of completions versus drilling would have on a quarterly trajectory for production?

[Douglas Suttles, executive]

Yes, Brian. You kind of nailed it yourself there. It really is the fact that we've got 10 rigs and actually ended last year at higher activity levels. So and we're not a duck company, we've never done that, played that game. So this is a matter of completing these wells that have been drilled and get on that steady cadence. And of course it will create a little bit of a bulge in the production profile as we go through the year.

[Brian Singer, analyst]

Got it. So I assume production would then probably start high, come off and then we would see more of the ramp over the course of 2020 as the cube strategy plays out?

[Douglas Suttles, executive]

That's exactly right, Brian. You'll see the effect of this higher completion activity, more rails turned in line more in the middle of the year. Then as we go to the second half of the year and into '20, you'll see more of a steady state, more like what you've been seeing from us in the Permian.

[Brian Singer, analyst]

Great. And then longer term, you talked about the 2019 guidance here, but how do you think about the optimal production growth relative to free cash growth with the new assets and how sustainable do you think those are? How long can you keep whatever the target or optimal growth rate is?

[Douglas Suttles, executive]

Well, we do have a really strong deep inventory across these 3 plays. It does -- as you know, it allows us to manage some risk which are hard to control as well. So it gives us flexibility to ensure that the top line on the company's doing what we want it to do as we manage the details underneath. We've kind of come to the view that high single digit growth rates while generating strong free cash is the model because one of the things it does, it also allows over time to sustainably grow the dividend. Obviously we'll take that view based on a very conservative view on commodity price. But we think that's the right balance. We think the business can do that for a very long time. And of course our intent is to constantly drive efficiencies. We've been doing that pretty steadily over time and that creates additional upside. So we think we've got the right portfolio. We obviously have the right balance sheet today. And I think we've got the business model, the execution behind and we feel we have all of the building blocks.

[Operator]

Your next question comes from Jeffrey Campbell with Tuohy Brothers.

[Jeffrey Campbell, analyst]

I want to just -- we talked a lot about the other plays being cash flow, free cash flow generators. I just wanted to know which of the Core 3 plays are currently free cash positive and if any of them are not, when do you expect them to start to generate free cash?

[Douglas Suttles, executive]

I actually love that question because I know there's lots of discussion with some of the pure play companies about when they'll get there. Every one of our plays is free cash positive. In fact our Permian has been there for a couple of years. So every place we operate today that we invest capital, it actually generates more cash flow than it consumes. And that I think underpins the quality of the asset base we have and the way we've been executing. So our Permian is free cash positive, was free cash positive last year. The Anadarko is that way and the Montney is that way as well.

[Jeffrey Campbell, analyst]

That's great. And within the other category, I just wanted to ask, is the spend being spread evenly or 1 or 2 of the basins within the group getting the lion share of investment?

[Douglas Suttles, executive]

Yes. And there is a little bit of a pie chart in the deck which will help you in some more detail in the backup, but the Permian is the biggest, the Anadarko just...

[Michael McAllister, executive]

Same with the others.

[Douglas Suttles, executive]

The other ones, okay. The other assets, I don't have that off the top of my head, what the split is, but I think the Eagle Ford gets a bit more, but it's also a bit bigger.

[Operator]

Your next question comes from Dennis Fong with Canaccord Genuity.

[Dennis Fong, analyst]

So the first is just a lead in from a previous question there. So just given kind of the view of a high single digit production growth with potentially incremental margin or efficiency savings from the CapEx or even from the OpEx side, how should we think about magnitude of potential dividend growth kind of going forward given that's kind of the second and a half priority that you have on your list of capital allocation?

[Douglas Suttles, executive]

Well, if you look at how we built the business and I want to be careful because I am not forecasting what we will do with dividends and that is a decision obviously we have to take with the board. But if you look at -- if we can grow our liquids volumes in the high single digits and you look at the quality across our plays, that the margins and returns are quite similar, that probably gives you some indication of what is possible over the run of time.

[Dennis Fong, analyst]

Okay, perfect. And then just kind of moving back into the asset side of things. With respect to some of the changes in completion strategies outside of the just moving towards the cube development, are there any other significant examples in terms of well design that you guys are pushing forward and how could that potentially impact individual well productivity on an individual basis while driving a lower well cost?

[Douglas Suttles, executive]

Well, I think that we actually think as you try to optimize development, this interaction between spacing and stacking and completion design is really important. So what we have been moving to over the last few years is how do we keep the frac energy close to the well bore because that maximizes recovery if you do that. So if you look at our designs, really what it works out to is tightly clustered, our tight per cluster spacing. We try to get long stage spacing so we keep the well cost low. We tend to use a lot of fine-grained sand and we also use very high pump rates. One of the reasons we do that is it allows us to use longer stages and get the diversion we need. We're actually starting to test that design in the Anadarko literally right now. So we've already put that to work. We'll see exactly how it performs. But as Mike said, these different plays are actually more alike than they are different. So we have a lot of confidence this formula is going to work and it will. And the other thing is we really do not like this idea that some people talk about, about pilots because the way unconventionals work is you are constantly learning and you want to be applying those learnings in real time to the next cube you drill and that's one of the reasons we focus on cycle time. Part of it is of course it helps returns, but the other piece is it means we get information back faster because we don't standardize anything today, we are constantly evolving it. So there is no one standard spacing or stacking in any of our plays today and that kind of mental mindset about pilot and then go plug and play it everywhere, we just think is a very suboptimal way to manage unconventional plays.

[Operator]

Your next question comes from Mike Dunn with GMP FirstEnergy.

[Michael Dunn, analyst]

My apologizes if this was addressed earlier in the call, I jumped on a bit late. But if you could walk us through, I guess, how flexible or dynamic that share buyback program might be with the free cash flow that you are generating depending on commodity prices.

[Douglas Suttles, executive]

Obviously we are not going to give any detail on how we execute that program and -- for some fairly obvious reasons. But what I can tell you is we have the money in the bank right now, so we have well over $1 billion in cash on hand today. So this buyback is not dependent on the free cash we generate in 2019. I think as we have indicated, we will be beginning the buyback essentially immediately once we clear blackout, which is Monday.

[Michael Dunn, analyst]

Okay. So in other words, based on I guess the current forward strip, your intention is to execute that program in full?

[Douglas Suttles, executive]

Yes, it is, yes. I think it would take some pretty unusual circumstances, something like a radical reduction in the price of oil for us to not execute that program this year.

[Operator]

Your next question comes from Josh Silverstein with Wolfe Research.

[Joshua Silverstein, analyst]

I just have a question on the return of cash to shareholders. I know you are focusing on trying to grow the dividends, but was curious about how you are thinking about Encana's free cash flow yield relative to the market if there is a number you are trying to target there, whether it might be mid-single digits or kind of along the same lines as your production grows there or if there might be another way of thinking about it as far as based on how much free cash flow you guys may have, will look to return 20% of it or 30% of it, just any sort of context around that will be helpful.

[Douglas Suttles, executive]

Yes, Josh, and I think we all know that one of the challenges as you think about that question is how you deal with commodity price because it obviously is a huge mover on cash flow. And what I think we are trying to demonstrate is how we think about priorities and how we expect the business to evolve over time. And clearly the first port of call particularly in any business, but particularly in a commodity based business is the strong balance sheet, the commitment to the current dividend and actually sustaining the current business scale and then as we get farther down the list, it's actually about how we can sustainably grow the dividends. That's really as the business grows and we look at cash flows with a very conservative view on commodity price. And then lastly, how you think about being opportunistic on share buybacks. Given we are commodity based enterprise, you need to think about that because the track record on buybacks in the industry generating value is mixed and partly that is, is when they are executed. And then of course the other 2 pieces there is high return, high quality investments to sustainably grow the dividend combined with continuing to manage the balance sheet. So that is how we think about it. I think that as we look at the yield, we believe we will be in a very attractive range not only compared to oil and gas companies, but compared to any industry.

[Joshua Silverstein, analyst]

Got it. The concept of special dividends really hasn't been talked about from the industry. I'm just wondering if that might be something you guys would consider as well just to allow some flexibility with the commodity price too. Is that something that will be on the table?

[Douglas Suttles, executive]

Well, it's kind of hard to say, Josh, but you are right, it hadn't been talked about a lot and at this point in where we are in our lifecycle, that is of something we have considered so far, but I wouldn't completely rule it out either.

[Joshua Silverstein, analyst]

Got it. And then just a question on the Montney, it's taking a little bit of a, I guess, a flat line on the liquids production from Q4 '18 levels. Can you just talk about the long-term growth of this asset? I know there was discussions of new facility commitments and the ability to go and further step up the liquids growth. So I just wanted to see if those were still on the table or if those are kind of pushed back for now?

[Douglas Suttles, executive]

Yes, we obviously -- and we talked about this at the beginning, we've sort of redrawn the line on how we balance growth with free cash flow. So that's the kind of 20% reduction year-over-year in capital. And obviously some of that was in the Montney, but we're still pursuing in building out our new Pipestone plant which is 2021. That's going actually very well, it's off to a fantastic start, cost look like they will come in lower than we originally anticipated and I think we've got a pretty good track record of building these plants. Remember that's our partnership with Keyera, they actually own that facility, but we are actually building it. So that is still a part of the plan. But also -- and Mike talked about the quality of some of our recent results in the Montney with these tower wells we had come on in 4Q and some we've had come on early this year are performing incredibly well. Some of them over 2,000 barrels of condensate per day, so just really, really strong wells. But Mike mentioned, as we position the business, we anticipated some of the takeaway challenges in Canada. Luckily we targeted our business for the most valuable product the country produces, which is condensate and we built the business around not requiring additional takeaway. But once we get above around the 1 BCF a day range, we essentially don't make any money on that gas. And so that also help shape our growth profile. So in the near term, it looks relatively flattish until we bring on the Pipestone facility here in a couple of years.

[Operator]

We have time for one last question, Travis Wood from National Bank Financial.

[Travis Wood, analyst]

If I could, could you help us understand how you are thinking about the intrinsic value of Encana and how that looks on a return profile as you consider the buyback and benchmark that against development drilling or the dividend as you look to deploy that free cash?

[Douglas Suttles, executive]

Yes, and Travis, I think what -- this year is probably a great example of that. So I think what we've done is when you think about the cash on hand we have and some of that is from the free cash we generated last year, some of it is from the divestments we did and then how we balanced organically, the underlying sustainable business and getting the balance right between free cash generation and growth. We think we have struck this right. We clearly intentionally put a slide in our deck about relative evaluation which we think makes the case for buying back shares today. We think that has to be part of the thinking when you do buyback shares, but we think we've struck that balance in the right place. And it's something we think you just constantly have to look at and look at the conditions in the business and then in the market, but we think we balanced those 3 factors today.

[Travis Wood, analyst]

Okay. And would you have a sense of what that return profile would be buying back stock today from a -- is it 25% return profile as you are considering the value of Encana, is that a fair question to ask this morning?

[Douglas Suttles, executive]

Well, it is kind of difficult to answer because I think we are an incredible buy in the market today because the underlying Encana is still here and now we have this powerful combination with Newfield and I hope we've already given you some confidence that the benefits of moving these 2 companies together, we're actually realizing right now in the first 2 weeks. So it is hard to put a precise number on it, but we think it is a very compelling value. I can also say the management and the board of this company also believe it because we've all bought a lot of shares ourselves.

[Operator]

At this time, we have completed the question-and-answer session, and would like to turn the call back over to Mr. Code.

[Corey Code, executive]

Thanks, Denise. This concludes our conference call for today. Thank you.

[Operator]

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