We are maintaining our Neutral recommendation on EnCana Corporation (ECA), reflecting its large asset base and strong financial profile, partially offset by gas price volatility.
Headquartered in Calgary, Alberta, EnCana is the second largest gas producer in North America, and holds a highly competitive land and resource position in a number of the region's most promising shale and tight gas resource plays. This provides the company with a low risk, long-life and sustainable growth profile.
In the third quarter of 2011, EnCana reported strong results, primarily reflecting higher volumes, but partially offset by low natural gas prices. The company’s operating earnings per share (excluding one-time items) were 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 our projection.
Moreover, EnCana’s strong balance sheet with a debt-to-capitalization ratio of approximately 34% in the third quarter and disciplined approach to capital investment is a real asset for the company. This has also helped the company to generate substantial cash flow ($4.4 billion for 2010) and pay a stable dividend to shareholders (currently yielding an attractive 4.1%).
However, the current unfavorable macro backdrop of weak natural gas prices remains our concern. EnCana’s extensive natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more diversified independent peers with higher oil production. The company, which derives almost all of its reserves/production from natural gas, has seen its sales and income fall drastically in recent quarters on the back of a sharp drop in gas prices.
We also believe that EnCana’s inability to secure the PetroChina Co. Ltd. (PTR) deal – the proposed sale of half of its prolific Cutbank Ridge shale natural gas assets in British Columbia and Alberta to the Chinese energy giant– will act as a setback for the natural gas supplier, as the proceeds were supposed to help support its balance sheet, fund an ambitious capital expenditure program and repay debt.
Considering these aspects, we expect the company to act at par with other industry players. EnCana shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.
ENCANA CORP (ECA): Free Stock Analysis Report
PETROCHINA ADR (PTR): Free Stock Analysis Report
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