EnCana Corp. (ECA) – Canada’s largest natural gas producer – reported weak second quarter results, primarily reflecting low natural gas prices, partially offset by higher volumes. Operating earnings per share, excluding one-time items, came in at 11 cents, missing the Zacks Consensus Estimate of 22 cents and way below the year-ago income of 63 cents. Revenues (net of royalties) came in at $1.5 billion, down 40.0% year-over-year and also missing the Zacks Consensus Estimate of $1.6 billion.
Production Summary
Production was up approximately 7.9% year-over-year to 3,344 million cubic feet equivalent per day (MMcfe/d), primarily due to a 9.5% rise in natural gas production (from 2,924 MMcfe/d in the second quarter of 2009 to 3,202 MMcfe/d). Volumes from key resource plays reached 3,003 MMcfe/d, up 16.9% 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 21.7% year-over-year to $5.50 per thousand cubic feet (Mcf).
Cash Flows and Drilling Statistics
EnCana generated cash flows from operations of $1.2 billion or $1.65 per share, down from $1.4 billion or $1.90 per share during the June quarter of 2009. The company drilled 151 net wells during the quarter, exactly the same number as 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, 2010, EnCana had cash on hand of $1.5 billion and long-term debt (including current portion) of $7.8 billion, representing a debt-to-capitalization ratio of 31.6%.
During the quarter, EnCana purchased 5.5 million of its shares at an average price of $32.54, or about $179 million.
Guidance
The company said that it expects full-year 2010 production to be 3,365 MMcfe/d, while capital spending is likely to be $4.5 billion.
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, we believe that the current unfavorable macro backdrop for E&P companies offsets most, if not all, of the positives. 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 is currently rated as Zacks #3 Rank (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months.
Read the full analyst report on “ECA”
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