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Encana (ECA) to Report Q2 Earnings: What's in the cards?

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Canadian natural gas producer Encana Corporation (ECA - Free Report) is set to release its second-quarter 2017 results before the opening bell on Jul 21.

In the preceding three-month period, the Calgary, Alberta-based company reported better-than-expected operating earnings on the back of higher realized prices, higher revenues and successful cost containment efforts.

Encana has an impressive earnings surprise history. The company posted a positive earnings surprise in each of the last four quarters, the average being 275%.

Let’s see how things are shaping up for this announcement.

Encana Corporation Price and EPS Surprise

 

Factors to Consider This Quarter

Encana is a leading energy firm with high quality portfolio of natural gas assets spread over Canada and the U.S. The company’s strong presence in Montney and Duvernay gas formations along with Eagle Ford and the lucrative Permian shale are likely to boost the company’s earnings. During the quarter, the company implemented cube development and advanced completion practices which have boosted the well performances in the Permian Basin and added 700 ‘premium return drilling locations’ to the Permian asset base.

Encana’s strategies to divest the high-cost and low-profit assets provide it with ample cash to accelerate growth. During the quarter, the company offloaded assets in the Piceance Basin for $735 million. This will streamline the company’s portfolio and help it to refocus production spending in its core plays. Additionally, the proceeds will be utilized to repay debts and strengthen the company’s balance sheet. Further, Encana’s successful cost reduction initiatives are expected to improve the margins and boost earnings.

However, being an upstream firm, weakness in the commodity prices might call for reduced exploration and production activities. During the second quarter, the price of natural gas declined by 5%. This may negatively impact the earnings and revenues of the company. As it is, during the quarter, Encana has underperformed the Zacks categorized Oil/Gas Production & Exploration Canadian industry. Over the said time frame, the stock has lost 25% compared with the 16.5% decline of the broader industry.

Earnings Whispers

Our proven model does not conclusively show that Encana is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -25.00%. This is because the Most Accurate estimate is 3 cents, while the Zacks Consensus Estimate is pegged at 4 cents.

Zacks Rank: Encana currently carries a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

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

Stocks Poised to Beat Earnings Estimates

While an earnings beat looks uncertain for Encana, here are some energy firms you can consider on the basis of our model, which shows that they have the right combination of elements to beat estimates this quarter:

Canadian Natural resources Limited (CNQ - Free Report) has an Earnings ESP of +61.9% and sports a Zacks Rank #1. The company is expected to report earnings results on Aug 3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Gastar Exploration Inc. (GST - Free Report) has an Earnings ESP of +33.33% and carries a Zacks Rank #3. The company is anticipated to report earnings on Aug 3.

TransCanada Corporation (TRP - Free Report) has an Earnings ESP of + 7.84% and carries a Zacks Rank #1. The company is anticipated to report earnings on Jul 27.

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