TLM

Canada’s largest natural gas producer EnCana Corp. (ECA) has reported impressive second quarter results, reflecting strong natural gas and liquids output based on efficient operational activities and competent workforce.

The company’s operating earnings per share (excluding one-time items) of 22 cents breezed past the Zacks Consensus Estimate of 11 cents and were way above the year-ago earnings of 9 cents.

Revenues (net of royalties) came in at $1.986 billion, up 35.2% year over year and 17.7% above our projection.

Production Summary

Production was up approximately 3.3% year over year at 3,455 million cubic feet equivalent per day (MMcfe/d), aided by a jump in natural gas production to 3,309 MMcfe/d from 3,202 MMcfe/d in the second quarter of 2010. Volumes from key resource plays expanded 5.3% year over year to 3,345 MMcfe/d.

Realized natural gas prices were down approximately 7.4% year over year at $5.09 per thousand cubic feet, while realized liquids prices improved 38.2% to $92.66 per barrel.

Cash Flows and Drilling Statistics

EnCana generated cash flows from operations of $1.087 billion or $1.47 per share, as against $1.217 billion or $1.65 per share during the second quarter 2010. The company drilled 145 net wells during the quarter, as against 151 in the prior-year period.

Capital Spending and Balance Sheet

EnCana’s capital investments during the quarter were $1.1 billion (excluding acquisitions and divestitures). As of June 30, 2011, EnCana had $120 million cash on hand and long-term debt (including current portion) of $8.49 billion, representing a debt-to-capitalization ratio of 33.3%.

Guidance

The company maintained its full-year 2011 production guidance at 3,475–3,525 MMcfe/d. Capital spending is likely to be $4.6–$4.8 billion. EnCana also guided toward 2011 cash flow of $5.40–$5.90 per share.

Our Recommendation

EnCana, with a large natural gas resource portfolio in North America and Canada, provides a highly diversified inventory of reserves and resource base. The company’s continued focus on low cost operations in high potential growth areas such as Haynesville, Horn River and Montney is expected to generate high volumes in the coming months.

However, EnCana’s lack of commodity and geographic diversification of assets will likely hamper its performance amid a low natural gas price scenario. We also remain apprehensive about the company’s high capital spending target, which might result in an increased debt level.

We maintain our long-term Neutral recommendation for the shares. EnCana, which competes with peers such as Cabot Oil & Gas Corporation (COG) and Talisman Energy (TLM), holds a Zacks #3 Rank (short-term Hold rating).

 
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