Encana Stands at Neutral - Analyst Blog
25 May 2012 - 11:30PM
Zacks
We are maintaining our Neutral
recommendation on Encana Corporation (ECA),
reflecting its diverse and richquality portfolio of natural gas
assetsalong with well-designed investment program. However, the
current unfavorable macro backdrop (weak natural gas prices)
remains an overhang on the stock.
Headquartered in Calgary, Alberta,
Encana is one of the largest natural gas companies in North America
with operations spread over Canada and the U.S. The company boasts
of a large inventory of reserves and a resource base capable of
robust production growth.
During the first three months of
2012, Encana performed impressively, buoyed by higher production
and gains from a shift toward liquids output while cutting on
natural gas production in response to decade-low prices.
We appreciate Encana’s strategy of
renovating its commodity mix from pure natural gas to both liquids
and gas. With a clouded natural gas scenario in North America, the
company targets to direct almost 55% of its capital investment
toward liquids plays in 2012. We believe that Encana will be able
to achieve its oil production target for the year, helped by
extensive and fast-growing activities (planed to drill almost 40 to
45 assessment wells in the first half of 2012) in the rich oily
plays.
Encana has also adopted a
disciplined approach toward capital investment and project
execution. The company, with a proficient and expert manpower, aims
to invest in ventures that will likely generate high returns in the
future. Management also remains highly focused on streamlining its
cost structure and improving capital efficiency.
However, the current unfavorable
macro backdrop of weak natural gas prices remains our concern.
Encana remains highly exposed to this gas price fluctuation and
will likely experience a drop in sales and earnings in the coming
months, unless it is able to cope up with the volatility.
Additionally, the growing
popularity of renewable sources of energy, such as wind and solar,
also poses as a major threat to natural gas operators. Although
expensive, many customers are opting for this sustainable source of
energy for its environmental friendly nature.
Other factors that prevent us from
being too optimistic on Encana are operational hindrances,
challenging market prices and cost inflation.
Considering these aspects, we
expect the company to act at par with other industry 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
TALISMAN ENERGY (TLM): Free Stock Analysis Report
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