EnCana Corp. (ECA) — Canada’s largest natural gas producer — reported weak third quarter results, primarily reflecting low natural gas prices, partially offset by higher volumes. Operating earnings per share, excluding one-time items, came in at 13 cents, missing the Zacks Consensus Estimate of 22 cents and way below the year-ago income of 50 cents.
However, revenues (net of royalties) came in at $2.4 billion, up 6.8% year-over-year and also beat the Zacks Consensus Estimate of $1.7 billion amid improved output.
Production Summary
Production was up approximately 15.2% year-over-year to 3,322 million cubic feet equivalent per day (MMcfe/d), primarily due to a 16.7% rise in natural gas production (from 2,725 MMcfe/d in the third quarter of 2009 to 3,181 MMcfe/d). Volumes from key resource plays reached 2,987 MMcfe/d, up 23.2% 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 29.2% year-over-year to $5.27 per thousand cubic feet (Mcf).
Cash Flows and Drilling Statistics
EnCana generated cash flows from operations of $1.1 billion or $1.54 per share, down from $1.3 billion or $1.70 per share during the September quarter of 2009. The company drilled 295 net wells during the quarter, as against 161 in the prior-year period.
Capital Spending and Balance Sheet
EnCana’s capital investments during the quarter were $1.2 billion (excluding acquisitions and divestitures). As of September 30, 2010, EnCana had cash on hand of $1.4 billion and long-term debt of $7.6 billion, representing a debt-to-capitalization ratio of 30.4%.
During the first three quarters of 2010, EnCana purchased 15.4 million of its shares at an average price of $32.42, or about $499 million.
Guidance Lowered
The company said that it now expects full-year 2010 production to be 3,315 MMcfe/d (down from the previous guidance of 3,365 MMcfe/d), while capital spending is likely to be $4.8 billion (as against earlier estimates of $5.0 billion). EnCana also lowered its 2010 cash flow to $5.95 – $6.20 per share compared to the former target of $5.95 – $6.50 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 and resource base. 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) have 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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