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Canadian natural gas producer Encana Corporation (ECA - Analyst Report) is set to release its fourth quarter 2013 results before the opening bell on Thursday, Feb 13.

Last quarter, Encana posted a 33.3% positive surprise, driven by a significant increase in liquid output, supported by a substantial drop in expenses. Let’s see how things are shaping up for the fourth quarter results.

Factors to Consider

In Dec 2013, the company announced that it would lower capital expenditure by about 10% in 2014. A major portion of this reduced budget will go to the development of liquid-rich resource plays as Encana plans to increase its liquids production by 30%. However, natural gas would still make up around 80% of the company’s total output. Investor disappointment was evident as shares fell significantly post announcement.

Also worth mentioning is that the company expects overall volume level to remain flat year-over-year despite the expected boost in Encana’s oil and natural gas liquids output.

Quarterly dividend paid in December tanked 65% to 7 cents per share from 20 cents per share owing to a weak natural gas pricing environment. This further harbors negative sentiment.

Though we see a solid long-term potential for Encana as it shifts base to the more profitable liquids assets and increases its cost effectiveness, we are less hopeful of the upcoming earnings.

Earnings Whispers?

Our proven model does not conclusively show that Encana will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. Unfortunately this is not the case here as elaborated below.

Zacks ESP: The Most Accurate estimate stands at 16 cents, while the Zacks Consensus is higher at 18 cents. This results in a difference of -11.1%.

Zacks Rank: Encana’s Zacks Rank #3 (Hold), however, increases the predictive power of ESP. That said we also need to have a positive ESP to be confident of an earnings surprise call.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks unlikely for Encana, here are some energy firms that you may want to consider on the basis of our model, which shows that these have the right combination of elements to post an earnings beat this quarter:

New Source Energy Partners L.P. (NSLP - Snapshot Report) with earnings ESP of +19.05% and a Zacks Rank #1 (Strong Buy).

Penn Virginia Corporation (PVA - Snapshot Report), with earnings ESP of +20.00% and a Zacks Rank #2 (Buy).

Breitburn Energy Partners L.P. (BBEP - Snapshot Report), with earnings ESP of +3.57% and a Zacks Rank #2.

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