Canada’s largest natural gas producer EnCana Corp. (ECA) reported weak first quarter results, primarily reflecting low natural gas prices, partially offset by higher volumes.
The company – which entered into a C$ 5.4 billion natural gas venture in northeastern British Columbia and Alberta with Chinese energy giant PetroChina Co. Ltd. (PTR) during the quarter – announced operating earnings per share (excluding one-time items) of 2 cents, missing the Zacks Consensus Estimate of 16 cents and way below the year-ago income of 53 cents.
Revenues (net of royalties) came in at $ 1.7 billion, down 53.0% year over year but slightly above the Zacks Consensus Estimate.
Production Summary
Production was up approximately 2.1% year over year to 3,335 million cubic feet equivalent per day (MMcfe/d), primarily due to a 2.3% rise in natural gas production (from 3,123 MMcfe/d in the first quarter of 2010 to 3,196 MMcfe/d). Volumes from key resource plays reached 3,229 MMcfe/d, up 5.1% year over year.
Gas volumes benefited from strong growth in Cutbank Ridge and Horn River resource plays in British Columbia. Realized natural gas prices during the quarter were down approximately 18.6% year over year to $ 5.00 per thousand cubic feet (Mcf).
Cash Flows and Drilling Statistics
EnCana generated cash flows from operations of $ 955 million or $ 1.29 per share, as against $ 1.2 billion or $ 1.56 per share during the March quarter of 2010. The company drilled 459 net wells during the quarter, as against 448 in the prior-year period.
Capital Spending and Balance Sheet
EnCana’s capital investments during the quarter were $ 1.3 billion (excluding acquisitions and divestitures). As of March 31, 2011, EnCana had cash on hand of $ 127 million and long-term debt (including current portion) of $ 8.0 billion, representing a debt-to-capitalization ratio of 32.2%.
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. The transfer of the high-quality and high-growth enhanced oil recovery and downstream assets (post-split) has also held back the stock.
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.
ENCANA CORP (ECA): Free Stock Analysis Report
PETROCHINA ADR (PTR): Free Stock Analysis Report
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