Canada’s largest natural gas producer Encana Corporation (ECA - Analyst Report) reported weak fourth quarter results, primarily reflecting low natural gas prices.
The company announced operating earnings per share (excluding one-time items) of 6 cents, below the Zacks Consensus Estimate of 8 cents and the year-ago income of 7 cents.
However, revenues (net of royalties) came in at $2.5 billion, up 72.0% year over year and 36.7% above the Zacks Consensus Estimate, driven by higher production.
For its fiscal year ended December 31, 2011, Encana reported profit of 54 cents per share on revenues of $8.5 billion.
Production & Prices
Production was up approximately 7.4% year over year to 3,602 million cubic feet equivalent per day (MMcfe/d), primarily due to a 7.1% rise in natural gas production (from 3,230 MMcf/d in the fourth quarter of 2010 to 3,459 MMcf/d). In particular, natural gas volumes from key resource plays reached 3,366 MMcfe/d, up 7.9% year over year. Gas output benefited from strong growth in Haynesville shale in Texas/Louisiana.
For the year ended December 31, 2011, production of natural gas and liquids reached 3,477 MMcfe/d, up 4.7% from 2010.
Realized natural gas prices during the quarter were down approximately 4.8% year over year to $4.79 per thousand cubic feet (Mcf).
Cash Flows and Drilling Statistics
Encana – North America’s number two producer of natural gas, only behind Exxon Mobil Corporation (XOM - Analyst Report) – generated cash flows from operations of $976 million or $1.32 per share, as against $917 million or $1.25 per share during the December quarter of 2010. The company drilled 360 net wells during the quarter, as against 760 in the prior-year period.
Capital Spending and Balance Sheet
Encana’s capital investments during the quarter were $1.0 billion (excluding acquisitions and divestitures), while the full-year outlay came to $4.6 billion. As of December 31, 2011, Encana had cash on hand of $732 million and long-term debt (including current portion) of $8.1 billion, representing a debt-to-capitalization ratio of 33.1%.
Asset Sale Update
As part of its efforts to weather low gas prices and put resources into developing the more profitable liquids-rich projects, Encana announced an agreement with Japanese giant Mitsubishi Corporation to offload a major stake in its British Colombia gas assets for $2.9 billion.
As of year-end 2011, Encana had 14.2 trillion cubic feet equivalent (Tcfe) in proved reserves, of which more than 94% was natural gas. The company’s 2011 year-end proved reserves tally was down slightly (by 0.7%) from the year-earlier level.
The company said that it expects full-year 2012 natural gas production to be 2,800–3,100 MMcf/d and oil output of 28,000 barrels per day. Capital spending is likely to be some $2.9 billion, a decline of about 37% from 2011 level. Encana also guided towards 2012 cash flow of $4.75 per share.
Rating & Recommendation
Encana, which spun off its oil sands business into a separate, independent and publicly traded company Cenovus Energy (CVE - Snapshot Report) in 2009, currently retains a Zacks #3 Rank, translating into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
Encana has one of the largest natural gas resource portfolios in North America, which provides a diverse/high quality inventory of reserves. We see a solid long-term future for the company as demand for natural gas soars, spurred by its cost effectiveness and abundant supply in North America. Furthermore, we appreciate Encana’s strategy realignment to direct most of its 2012 spending on liquids-rich plays.
However, the Calgary, Alberta-based firm’s sizeable exposure to weak natural gas prices offsets these strengths and remains a key area of concern, in our view. Inability to secure the PetroChina (PTR - Analyst Report) deal and the transfer of the high-quality/high-growth enhanced oil recovery and downstream assets (post-split) have also held back the stock.