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Encana Gains as Output From Key Assets Tops Estimates in Q4


Shares of Encana Corporation ECA moved up around 2.5% to eventually close the day at $13.64 on Jan 9 after the company announced that fourth-quarter production volumes from core assets beat estimates. The upstream operator has successfully repositioned its asset base and shifted focus to four key growth areas namely Montney, Duvemay, Eagle Ford and Permian.

On the back of the strength of core assets, Canadian energy behemoth delivered year-over-year production growth of approximately 31% in the fourth quarter of 2017. Further, the output also topped the high end of the company’s guidance range of 25-30%.

While the exact total production figures have not been released, an increase of around 31% implies that the output from the core assets jumped to around 310,601 barrels of oil equivalent per day (BOE/d) in the fourth quarter of 2017 as against the 237,100 BOE/d (or 74% of the total production) recorded in the year-ago quarter.

The company’s innovative practices in drilling and well completion including ‘Cube’ concept contributed to strong results in the Permian Basin. The company’s fourth quarter output in the region came in at 80,000 BOE/d exceeding the company’s guidance of 75,000 BOE/d. With Tower, Saturn and Sunrise processing plants coming online prior the schedule, the liquids production in Montney more than doubled during the fourth quarter of 2017 when compared with the prior-year quarter.

With 2017 ending on a strong note, the company remains on track to meet its five year-plan, thereby generating strong returns. The company is targeting a production growth of 60% from its core assets through 2021, while being within its cash flows. Management also expects its cash flow to skyrocket about 300% with its margins doubling over the next five years.

Encana is expected to keep its capex for 2018 in line with 2017, at around $1.8 billion, with 70% allocated toward Montney and Permian plays. As such, it expects year-over-year production growth of 25-30% in the fourth quarter of 2018, with significant oil and condensate growth in the second half of 2018. Encana expects its liquid production to increase in 2018 as it intends to complete two additional liquids hubs by the second half of this year, thereby reducing exposure to weak natural prices.

Over the years, the company has increased its focus to streamlining its portfolio by divestiture of its non-core assets including Gordondale and DJ Basin holdings. During the fourth quarter of 2017, the company vended most of its Wheatland properties which does not fit into Encana’s long-term growth plans. These assets accounted for the production of around 60 million cubic feet per day of natural gas in 2017.

Encana’s competitive land and resource position in the most promising shale plays provide the company with a low risk, long-life and a sustainable growth profile. Its cost-reduction initiative and divestment of high-cost low-profit assets offer financial flexibility to the company to handle the current volatile market condition in a better fashion. However, the company’s huge exposure to natural gas remains a key area of concern on account of weak pricing environment.

Encana has underperformed the broader industry with its stock gaining 5.8% over a year compared with the industry’s rally of 11.1%.

The company currently carries a Zacks Rank #4 (Sell).

Investors interested in the same space can consider some better-ranked players like Canadian Natural Resources Limited CNQ, Crescent Point Energy Corporation CPG and Gastar Exploration Inc. GST. All the three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Canadian Natural is expected to record 138.1% year-over-year earnings growth in 2018.

Crescent Point is likely to witness 211.9% year-over-year earnings growth in 2018.

Gastar is expected to record 127.12% year-over-year earnings growth in 2018.

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