Encana Still in Neutral Lane - Analyst Blog
27 March 2012 - 12:30AM
Zacks
We are maintaining our Neutral
recommendation on Encana Corporation (ECA),
reflecting its vast natural gas resources and attractive
collaborations, partially offset by soft fourth quarter 2011
results and an unstable natural gas scenario.
Headquartered in Calgary, Alberta,
Encana is one of the largest natural gas companies in North America
with 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.
Over the past few months, Encana has
entered into lucrative alliances with other companies. The deal
with Mitsubishi in developing the Cutbank Ridge – one of the most
fertile and low-cost resource rich acreages in North America –
holds promise of unlocking high productivity in the near term.
Additionally, Encana’s pact with AGL Resources
(GAS) will also provide a steady supply of liquefied natural gas
for its new fueling stations over the long term.
We support Encana’s strategy of
disposing assets that do not fit into its long-term growth plan.
The company’s divesture program includes the disposition of high
cost yet low profit generating assets and a focus on asset base
expansion that would render high returns. The net proceeds received
from these property sales (more than $1.5 billion in 2011) also
render strong financial flexibility to the company.
However, Encana’s performance in the
last three months of 2011 has been disappointing for us. The
company announced operating earnings per share (excluding one-time
items) of 6 cents, below our projection of 8 cents and the year-ago
income of 7 cents, primarily due to lower realized natural gas
prices.
For 2012, Encana plans to invest
about $2.9 billion on capital programs, reflecting a reduction of
about 37% from the 2011 level. We believe that lower capital
spending on dry natural gas programs will likely lead to cropped
natural gas production, thereby hurting the company’s overall
volume level.
Another area of concern for us is
the transfer of the high-quality and high-growth enhanced oil
recovery and downstream assets (post-split). As a result, the
business risk profile of the reorganized Encana is weaker than that
of the predecessor company.
Hence, we expect Encana to be at par
with the broader industry and other players such as
Canadian Natural Resources Ltd. (CNQ) and
Talisman Energy Inc. (TLM). Encana shares
currently retain a Zacks #3 Rank, which translates into a
short-term Hold rating.
CDN NTRL RSRCS (CNQ): Free Stock Analysis Report
ENCANA CORP (ECA): Free Stock Analysis Report
AGL RESOURCES (GAS): Free Stock Analysis Report
TALISMAN ENERGY (TLM): Free Stock Analysis Report
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