Encana Corporation (NYSE: ECA) is an energy producer that is focused on developing its multi-basin portfolio of natural gas, oil and natural gas liquids producing plays. The Company’s operations also include the marketing of natural gas, oil and NGLs.
The company has been offloading its natural gas assets to improve the overall health of its balance sheet amid constrained liquidity and financial flexibility situations. It recently announced that that its wholly owned subsidiary, Encana Oil & Gas (USA) Inc., has completed the previously announced sale of its Piceance natural gas assets, located in northwestern Colorado, to Denver-based Caerus Oil and Gas LLC (Caerus).
From a business & financial performance point of view, the company’s margins are improving, production is back on growth trajectory, innovation is coming fast and the balance sheet is strengthening as well. In fact, Encana is outperforming its initial 2017 corporate guidance, reflecting its efficiency. The company is maintaining its original capital investment guidance range while lowering expected costs and increasing expected production growth from its core assets from the fourth quarter of 2016 to the fourth quarter of 2017 to between 25 to 30 percent.
Last month Encana reported robust set of numbers for Q2. Revenues tripled compared to the similar period last year. Earnings surged to $331 million, which was a significant improvement against $601 million of loss that the company suffered a year earlier. As per management, ECA is gradually improving corporate margin, driven by a balanced production mix, strong oil and condensate growth and lower costs. In fact, for the third consecutive year, it has significantly strengthened its balance sheet.
Also, from a risk management perspective, the company hedges itself from volatile price movements by entering into derivative transactions. As per management, over three-quarters of ECA’s production are hedged due its prudent risk-management strategies. The combination of innovative operations, commercial ingenuity, and preserving optionality is enabling ECA to create value even at subdued oil prices.
Driven by management team’s recent efforts, which are slowly starting to pay off and potential tailwind of the improving U.S. oil inventory issue; ECA’s updated guidance reflects its strong performance, efficiency and confidence. ECA is generating significant momentum and is well positioned for 2018.
With the recent developments, analysts have revised their outlook on the stock: The stock currently has an average rating of “BUY” and a consensus price target of $16.35. Considering present valuation, ECA is at an extremely favorable risk reward position.
About the Company: Encana is a leading North American energy producer that is focused on developing its strong portfolio of resource plays, held directly and indirectly through its subsidiaries, producing oil, natural gas liquids (NGLs) and natural gas. By partnering with employees, community organizations and other businesses, Encana contributes to the strength and sustainability of the communities where it operates. Encana common shares trade on the Toronto and New York stock exchanges under the symbol ECA.
Outlook About the industry:
Crude prices over the near term is expected to reflect a sideways-to-bullish trend and remain range bound between $45-$55 per barrel. Even as North American shale supply remains robust, oil will be supported by the continued strengthening of global oil markets through OPEC constrained production and improving global demand situation.
Overall, oil prices in 2017 are expected to be relatively higher than 2016 levels. That said, it would remain significantly lower than $100-per-barrel levels at which oil traded prior to the commodities slump that started in July 2014.
Long-term fundamentals for Natural Gas continue to be bullish due to structural imbalances. While domestic natural gas production is expected to improve this year, higher use of liquefied natural gas (or LNG), booming exports to Mexico, replacing coal-fired power plants and higher demand from industrial projects will likely support increased output. This all put together would lead to price eventually settling above $3.
The industry currently has a trailing 12-month EV/EBITDA ratio of 6.89, which is lower than the median value of 8.62 over the past year.
Highlights of 2017’ performance:
Encana continues to successfully manage inflation as it efficiently develops its core assets at scale. Through sophisticated planning, supply chain management and operating efficiencies, the company expects to hold like-for-like drilling and completion costs essentially flat year-over-year. On a per unit basis, combined second quarter operating costs (excluding long-term incentives) and transportation and processing costs were down $0.34 per BOE compared to the first quarter of 2017.
Operational improvements and productivity gains across the portfolio through the first half of 2017 strengthened Encana’s resiliency. The company now expects it can deliver its five-year growth plan, announced in October 2016, in a flat $50 WTI oil price environment. For the third consecutive year, Encana expects to significantly strengthen its balance sheet. The sale of its Piceance assets is expected to close in the third quarter of 2017. Transaction proceeds plus cash flow from anticipated strong operating performance means that by year-end 2017, Encana expects its net debt to adjusted EBITDA ratio will be approximately two times and that it will have total liquidity of over $5 billion. Encana has no debt maturities until 2019 and almost 75 percent of its long-term debt is not due until 2030 and beyond.
For 2018, the company has hedged approximately 31,000 bbls/d of expected oil and condensate production at an average price of $55.45 per bbl and approximately 650 MMcf/d of expected natural gas production at an average price of $3.07 per Mcf.
On July 20, 2017, the Board declared a dividend of $0.015 per share payable on September 29, 2017 to common shareholders of record as of September 15, 2017
2nd Quarter 2017 Financial Results:
- Net earnings of $331 million compared to a loss of $601 million in the second quarter of 2016.
- Cash from operating activities of $218 million and non-GAAP cash flow of $351 million, up 26 percent from the previous quarter
- Non-GAAP corporate margin of $12.19 per barrel of oil equivalent (BOE), up 25 percent from the previous quarter despite lower benchmark commodity prices
- Core asset production of 246,500 barrels of oil equivalent per day (BOE/d), up 9,200 BOE/d from the previous quarter; Encana now expects its core assets will deliver 25 to 30 percent production growth from the fourth quarter of 2016 to the fourth quarter of 2017
- Liquids production of 124,900 barrels per day (bbls/d), including oil and condensate production of 100,200 bbls/d, up 14 percent from the previous quarter
- Increased well productivity across its core assets and grew its premium return well inventory to over 11,000 locations
- By year-end 2017, Encana expects its net debt to adjusted EBITDA ratio will be approximately two times and that it will have total liquidity of over $5 billion
Key risk factors and potential stock drivers:
The company is exposed to credit risk. Substantial portions of the Company’s accounts receivable is with customers in the oil and gas industry and are subject to industry credit risks.
The oil and gas industry is cyclical and commodity prices are inherently volatile. Oil prices during 2017 are expected to reflect global supply and demand dynamics as well as the geopolitical environment. In addition, rapid increases in U.S. crude oil production or the continuation of elevated levels of U.S. oil storage inventories could also negatively impact prices. The company’s business risk profile will remain vulnerable to the fluctuations in the underlying commodity prices.
The company’s ability to ramp-up profitability while sustaining its revenue growth would be one of the key stock driver over the near to medium term.
Stock Chart:
On Friday, August 11th, 2017, ECA is trading at $9.69 (up 1.36%) on an average volume of 13.23 million shares exchanging hands. Market capitalization is $9.57 billion. The current RSI is 50.85
In the past 52 weeks, shares of ECA have traded as low as $8.10 and as high as $13.85.
At $9.69, shares of ECA are trading above its 50-day moving average (MA) at $9.28 and below its 200-day MA at $11.00
The present support and resistance levels for the stock are at $9.53 & $9.83 respectively.
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