Canada’s largest natural gas producer EnCana Corp. (ECA) reported strong third quarter results, primarily reflecting higher volumes, but partially offset by low natural gas prices.
The company – which competes with other Canadian behemoths like Suncor Energy Inc. (SU) and Canadian Natural Resources Ltd. (CNQ) – announced operating earnings per share (excluding one-time items) of 23 cents, comfortably beating the Zacks Consensus Estimate of 9 cents and the year-ago income of 12 cents.
Revenues (net of royalties) came in at $2.4 billion, down 3.0% year over year but were 39.5% above the Zacks Consensus Estimate.
Production Summary
Production was up approximately 5.7% year over year to 3,512 million cubic feet equivalent per day (MMcfe/d), primarily due to a 5.8% rise in natural gas production (from 3,181 MMcfe/d in the third quarter of 2010 to 3,365 MMcfe/d). Volumes from key resource plays reached 3,404 MMcfe/d, up 7.6% year over year.
Gas volumes benefited from strong growth in Haynesville shale in Texas/Louisiana and Horn River resource plays in British Columbia. Realized natural gas prices during the quarter were down approximately 4.9% year over year to $5.01 per thousand cubic feet (Mcf).
Cash Flows and Drilling Statistics
Encana generated cash flows from operations of $1.2 billion or $1.57 per share, as against $1.1 billion or $1.53 per share during the September quarter of 2010. The company drilled 164 net wells during the quarter, as against 295 in the prior-year period.
Capital Spending and Balance Sheet
Encana’s capital investments during the quarter were $1.2 billion (excluding acquisitions and divestitures). As of September 30, 2011, Encana had cash on hand of $310 million and long-term debt (including current portion) of $8.7 billion, representing a debt-to-capitalization ratio of 34.3%.
Guidance
The company maintained its full-year 2011 production guidance at 3,475–3,525 MMcfe/d, while capital spending is likely to be $4.6–$4.8 billion. Encana also guided towards 2011 cash flow of $5.40–$5.90 per share.
Our Recommendation
Encana has one of the largest natural gas resource portfolios in North America, which provides a diverse/high quality inventory of reserves. Other positive attributes in the Encana story include its active hedging policy, competitive cost structure, strong balance sheet and robust free cash flows. However, the company’s exposure to weak natural gas prices offsets these strengths and remains a key area of concern, in our view.
As such, Encana shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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