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Canada’s largest natural gas producer Encana Corporation (ECA - Analyst Report) reported strong first quarter results, primarily reflecting higher production and gains from a shift towards liquids output while cutting on natural gas production in response to decade-low prices.
The company announced operating earnings per share (excluding one-time items) of 33 cents, above the year-ago income of 30 cents and blowing away the Zacks Consensus Estimate of a loss of 3 cents.
Revenues (net of royalties) came in at $1.8 billion, up 7.9% year over year and 13.8% above the Zacks Consensus Estimate.
Production & Prices
Natural gas production was up approximately 2.4% year over year to 3,272 million cubic feet per day (MMcf/d), primarily due to a 2.3% rise in volumes from key resource plays. The company, which derives almost all of its reserves/production from natural gas, plans to reduce up to 600 MMcf/d of the commodity’s output in 2012 in an effort to cope with a price decline that saw gas slip to multi-year lows recently.
Encana’s realized natural gas prices during the quarter were down approximately 8.4% year over year to $4.58 per thousand cubic feet (Mcf).
Meanwhile, the company’s oil and liquids production climbed 25.8% to 29,300 barrels per day (Bbls/d), helped by a 21.3% improvement in output from kry resource plays. Encana’s oil and other liquids were sold for $83.77 per barrel, an increase of 3.8% from the first quarter of 2010.
Cash Flows and Drilling Statistics
Encana – North America’s number two producer of natural gas, behind only Exxon Mobil Corporation (XOM - Analyst Report) – generated cash flows from operations of $1.0 billion or $1.39 per share, as against $963 million or $1.31 per share during the March quarter of 2011. The company drilled 207 net wells during the quarter, as against 459 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 March 31, 2012, Encana had cash on hand of $2.4 billion and long-term debt of $7.7 billion, representing a debt-to-capitalization ratio of 47.5%.
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 during the quarter to offload a major stake in its British Columbia gas assets for $2.9 billion.
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.
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.