Canada’s largest natural gas producer EnCana Corp. (ECA) reported weak fourth quarter results, primarily reflecting low natural gas prices, partially offset by higher volumes.
The company – which yesterday entered into a C$5.4 billion natural gas venture in northeastern British Columbia and Alberta with Chinese energy giant PetroChina Co. Ltd. (PTR) – announced operating earnings per share (excluding one-time items) of 9 cents, missing the Zacks Consensus Estimate of 13 cents and way below the year-ago income of 50 cents.
Revenues (net of royalties) came in at $1.4 billion, down 47.2% year over year and also shy of the Zacks Consensus Estimate of $1.7 billion.
Production Summary
Production was up approximately 18.4% year over year to 3,353 million cubic feet equivalent per day (MMcfe/d), primarily due to a 20.2% rise in natural gas production (from 2,687 MMcfe/d in the fourth quarter of 2009 to 3,230 MMcfe/d). Volumes from key resource plays reached 3,045 MMcfe/d, up 26.0% year over year.
Gas volumes benefited from strong growth in Piceance and the Haynesville shale play. Realized natural gas prices during the quarter were down approximately 21.9% year over year to $5.03 per thousand cubic feet (Mcf).
Cash Flows and Drilling Statistics
EnCana generated cash flows from operations of $917 million or $1.25 per share, as against $930 million or $1.24 per share during the December quarter of 2009. The company drilled 760 net wells during the quarter, as against 295 in the prior-year period.
Capital Spending and Balance Sheet
EnCana’s capital investments during the quarter were $1.4 billion (excluding acquisitions and divestitures). As of December 31, 2010, EnCana had cash on hand of $629 million and long-term debt (including current portion) of $7.6 billion, representing a debt-to-capitalization ratio of 30.6%.
In 2010, EnCana purchased 15.4 million of its shares at an average price of $32.42, or about $499 million.
Guidance
The company said that it expects full-year 2011 production to be 3,475–3,525 MMcfe/d, while capital spending is likely to be $4.6–$4.8 billion. EnCana also guided towards 2011 cash flow of $5.40–$5.90 per share.
Our Recommendation
EnCana has one of the largest natural gas resource portfolios in North America, which provides a diverse/high quality inventory of reserves. Other positive attributes in the EnCana story include its active hedging policy, competitive cost structure, strong balance sheet and robust free cash flows.
However, the company’s exposure to weak natural gas prices offsets these strengths and remains a key area of concern, in our view. The transfer of the high-quality and high-growth enhanced oil recovery and downstream assets (post-split) has also held back the stock.
As such, EnCana shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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