Encana Lifts 2012 Investment Level

Leading Canadian natural gas firm Encana Corporation ( ECA - Analyst Report ) announced plans to boost its investment in oil fields by an additional $600 million for the balance of 2012, in an attempt to generate higher output.

The company has raised its total liquids production expectations for the year by 7% to 30,000 barrels per day (bbl/d). The liquid production in 2013 is expected between 60,000 bbl/d and 70,000 bbl/d, with oil and field condensate comprising 40%.

With the aim of higher output, Encana will now drill about 115–120 wells in 10 plays in 2012, against the previous guidance of 40–45 wells. For the next year, the company’s to-be-drilled oil and liquids well number will likely go up to approximately 350.

Calgary, Alberta-based Encana projects 2012 and 2013 natural gas production to remain almost in line with the current level of 3 billion cubic feet per day.

For 2013, the company plans to invest nearly $4.0 billion to $5.0 billion on capital projects and divest assets worth $1.0 billion to $1.5 billion. Cash flow is expected around $2.5 billion to $3.5 billion.

Encana management remains highly optimistic about the company’s performance in the coming days, owing to successful liquid plays activities achieved in the last few months.

Encana is one of the largest natural gas companies in North America, with a diverse/high quality portfolio of natural gas assets spread over Canada and the U.S. This provides the company with a huge inventory of reserves and a resource base capable of robust production growth.

We also support the collaboration of Encana and Mitsubishi in developing the Cutbank Ridge, which is one of the most fertile and low-cost resource rich acreages in North America. With a large proved undeveloped natural gas reserve, the region is expected to have the capacity of delivering long-term, affordable energy supplies to domestic and overseas markets.

However, operational hindrances, challenging market prices, growing popularity of renewable sources of energy and cost inflation are anticipated to weigh on Encana. Hence, we see limited upside potential on the stock and maintain a long-term Neutral recommendation.

Encana, which operates with other industry players such as Canadian Natural Resources Ltd. ( CNQ - Analyst Report ) and Talisman Energy Inc. ( TLM - Analyst Report ) , currently, retain a Zacks #3 Rank, which translates into a short-term Hold rating.