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We reaffirmed our Neutral recommendation on natural gas exploration and production (E&P) company Encana Corporation (ECA - Analyst Report) on May 2, 2013. Its drilling venture helped Encana deliver higher oil and liquids production. However, low natural gas volumes and hedging loss are concerns.

Why the Reiteration?

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.

Additionally, Encana was one of the first movers in areas like the Horn River Basin in northeastern British Columbia and the Haynesville shale in Texas and Louisiana. It has amassed formidable land positions in both these emerging regions and others. The company hopes to take advantage of the lower-than-average reserve decline rates and low-risk drilling opportunities that have characterized unconventional resource development across the industry in recent years.

We remain highly optimistic regarding the collaboration of Encana and Mitsubishi for the development of the Cutbank Ridge, which is one of the most fertile and low-cost resource rich acreages in North America. With large proved undeveloped natural gas reserve, the region is expected to deliver long-term, affordable energy supplies to domestic and overseas markets.

However, Encana’s extensive natural gas exposure raises its sensitivity to gas price fluctuations, compared to its more diversified independent peers with higher oil production.

Moreover, with the growing popularity of renewable sources of energy such as wind and solar, the operators of natural gas resources are facing tough competition. Although expensive, many customers are opting for sustainable sources of energy for their environmental-friendly nature.

Encana currently holds a Zacks Rank #2 (Buy). Other E&P firms in the energy sector that are worth considering include EPL Oil & Gas Inc. , McMoRan Exploration Co. and SM Energy Company (SM - Analyst Report) all holding a Zacks Rank #1 (Strong Buy).

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