We issued an updated research report on Encana Corporation ECA on Dec 16, 2015. The Calgary, Alberta-based oil and gas explorer 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. However, the company’s large exposure to natural gas continues to remain a key area of concern as commodity price is anticipated to remain weak in the near term.
This balanced view is reflected in Encana’s current Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.
Encana has a diverse/high quality portfolio of natural gas assets spread over Canada and the U.S. This provides the company with a huge inventory of reserves and a resource base capable of robust production growth.
The company projected 2016 capital budget in the range of $1.5 billion and $1.7 billion, almost 25% lower than 2015. Most importantly, the reduced budget will not hamper the company’s 2016 production as revealed by the expected output of 340,000 and 370,000 barrels of oil equivalent every day (BOE/D) – which is up 12% from the 2015 level.
Moreover, we appreciate Encana’s strategy of disposing assets that no longer fit into its long-term growth plan. The company’s divesture program is aimed at the sale of high cost yet low profit generating assets as well as to turn its focus on asset base expansion that would render high returns. Net proceeds received from these property sales also render a stronger financial flexibility.
However, being a firm in the upstream industry, Encana’s profit is influenced by commodity price fluctuations. With the company increasing focus on liquid production, low crude prices could significantly hamper financials for the firm. Also, with natural gas prices remaining weak, we don’t foresee the company earning considerably in the coming months. Moreover, the pricing weakness compelled the company to slash its 2016 dividend.
Stocks to Consider
Some better-ranked players in the energy sector are Murphy USA Inc. MUSA, Boardwalk Pipeline Partners, LP BWP and Energy Transfer Equity LP ETE. All the stocks sport a Zacks Rank #1 (Strong Buy).
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