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Why Is Encana (ECA) Down 25% Since Last Earnings Report?

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It has been about a month since the last earnings report for Encana (ECA - Free Report) . Shares have lost about 25% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Encana due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Encana Q3 Earnings Beat on Strong Production

Encana Corporation reported third-quarter 2018 operating earnings per share of 17 cents, outperforming the Zacks Consensus Estimate of 13 cents and the year-ago level of 2 cents.

Moreover, quarterly revenues of $1,262 million beat the Zacks Consensus Estimate of $1,252 million and were higher than the prior-year figure of $861 million.

The strong results are attributed to increased production along with higher price realizations.

Newfield Acquisition & Dividend Hike

Encana recently agreed to acquire Newfield Exploration Company  through a transaction valued at $5.5 billion. The deal is expected to complete in first-quarter 2019, following which, the company plans to increase dividend payment by 25% and increase its share repurchase program to $1.5 billion. Total third-quarter production of the combined entity was 577,000 BOE/d, 52% of which was liquids.

Production

Of late, Encana has successfully repositioned its asset base and transitioned to the more profitable crude. Production growth from its core assets, namely Permian, Montney, Eagle Ford and Duvernay, led the company to deliver impressive year-over-year results. Permian and Montney liquids production recorded a year-over-year increase of 54% and 151%, respectively.

Total third-quarter production came in at 378,200 barrels of oil equivalent per day (BOE/d) compared with 284,000 BOE/d in the prior-year quarter. Of the total production, 52.7% was natural gas.

Quarterly natural gas output increased 27% year over year to 1,197 million cubic feet per day (Mcf/d), while liquids (includes crude oil and NGLs) production rose 40% from the prior-year quarter to 178,700 barrels per day (BPD).

Realized Prices

Encana's realized natural gas price was $2.50 per Mcf compared with the year-ago level of $2.23. Further, realized oil price rose to $57.05 per barrel from $47.78 in the third quarter of 2017. NGLs Plant Condensate was realized at $52.89 per barrel in the reported quarter compared with $45.84 in the year-ago period. Moreover, NGLs Other prices were recorded at $27.23 per barrel compared with third-quarter 2017 figure of $19.00.

Costs & Expenses

Total operating expenses increased more than 32% from third-quarter 2017 to $1,143 million. The rise is primarily attributed to increase in depreciation and transportation charges, along with higher purchased products costs.

Dividend and Share Repurchase Program

On Oct 31, Encana declared a dividend of 1.5 cents per share payable on Dec 31 to shareholders of record as of Dec 14.

The company has authorization to buy back shares worth $400 million, with already having repurchased $250 million shares on a year-to-date basis.

Capital Expenditure

Encana's capital investments during the quarter were $523 million. In the first nine months of 2018, the company spent $1,626 million in capital expenditures.

Cash Flow

Encana’s cash from operating activities came in at $885 million, recording an increase of around 147.9% from the year-ago figure of $357 million. This helped the company generate $66 million in free cash flow.

Balance Sheet

As of Sep 30, 2018, cash and cash equivalents were $615 million, and long-term debt was $3,698 million. The debt-to-capitalization ratio came in at 36.3%.

Guidance

In the fourth-quarter, production from Montney assets is expected in the range of 55,000-65,000 BPD. The company reduced its transportation and processing costs guidance to $7.20-$7.40 per BOE from prior expectation of $7.40-$7.75. Moreover, for full-year 2018, it increased its capital expenditure guidance to around $2 billion from prior guided range of $1.8-$1.9 billion, primarily due to steel tariffs and other reasons. The company expects Pipestone liquids hub and the San Juan assets’ expenditure to total around $55 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -20% due to these changes.

VGM Scores

At this time, Encana has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Encana has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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