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Encana (ECA) Slips to 52-Week Low But Still Holds Promise
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Encana’s shares have been in the red territory for a while now, as is evident from a plunge of more than 64% over the past year, underperforming the broader industry’s 45% decline.
Also, the upstream player has declined more than 19% on a year-to-date basis. The stock slipped to a 52-week low of $4.53 in yesterday’s trading session, closing a tad higher at $4.65. While certain concerns relating to the Newfield buyout, weak natural gas prices and takeaway constraints are currently weighing on investors’ sentiments, we believe that the Zacks Rank #3 (Hold) firm still holds much promise and should be retained for long-term prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Aspects That Pushed the Stock to a Tight Spot
The company’s decision to buy fellow oil producer Newfield Exploration has not gone down too well with investors. The deal, which closed early this year, came with a hefty price tag of $7.7 billion, including Encana's assumption of about $2.2 billion of Newfield debt. Apart from increasing its debt load, the all-stock buyout deal led to the issuance of new shares, leading to equity dilution. Further, the buyout added a new region — the STACK shale of Oklahoma — to Encana’s portfolio, which increased execution risks as the company is not much familiar with these assets and can’t apply its learnings in the Permian Basin to this region.
To make matters worse, Encana reported a negative free cash flow of $314 million in the last reported quarter. In light of the debt load of more than $6.3 billion, the company announced dividend hikes and stock buybacks instead of emphasizing more on strengthening financials and cash flows.
As it is, existing pipeline takeaway constraints in the Permian Basin restricted Encana's ability to fully benefit from improving oil prices. Also, natural gas prices, which account for around half of Encana’s output, have been trading below $3 per MMBtu, in turn affecting the company's performance.
Can Strategies and Output Growth Pare Woes?
As we know, the company has successfully re-adjusted the asset base via acquisitions and divestments, transitioning to the more profitable crude over a couple of years. Of late, Encana entered into deals to jettison acreage in the natural-gas heavy Arkoma Basin and terminated the production sharing contract with CNOOC Limited (CEO - Free Report) , thereby exiting China operations. The deals are in sync with the firm’s goals of crude transition and efforts for monetization of non-core assets. Encana is concentrating on optimizing portfolio, and devoting its production spending on core plays and a fewer geographical areas.
Encana — which is riding high on impressive production from core assets namely Permian, Montney and Anadarko — is targeting 15% liquids production growth from core assets, while being within cash flows. The management team expects its cash flow to soar about 300%, with margins doubling over the next five years.
Encana’s low-cost business model is likely to help the company improve returns and emerge successful in the long haul. To its credit, Encana has been able to achieve a massive decline in the operating cost structure. Since 2015, the company has brought down drilling and completion costs in the Montney and Permian by around 25%.
Sporting a Zacks Rank #3, this Calgary, Alberta-headquartered company’s expected EPS growth rate for three-five years currently stands at 7.5%, comparing favorably with the industry's 6.8%.
Wrapping Up
While management is yet to derive financial advantage from the Newfield buyout, the combined entity has undoubtedly emerged as a major player in the unconventional space with enviable production growth prospects. We believe that the company’s bold bet is likely to pay big dividends down the road. Notably, its robust output and cash flow outlook instills confidence. Further, we expect that endeavors like divestments and cost cuts will boost the company’s performance in the forthcoming periods and enable it to return to investors’ good books.
Stocks to Consider
Investors interested in oilfield service stocks can consider Helix Energy Solutions Group, Inc. (HLX - Free Report) and Oceaneering International (OII - Free Report) , each sporting a Zacks Rank #1.
Helix managed to beat earnings estimates in three out of the trailing four quarters, with an average positive surprise of 71.88%. The company’s earnings per share are expected to grow 52.63% y/y in 2019.
Oceaneering surpassed earnings estimates in each of the trailing four quarters, with an average of 49.7%. The company’s top line is expected to grow 12.64% y/y in 2019.
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This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
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Encana (ECA) Slips to 52-Week Low But Still Holds Promise
Encana’s shares have been in the red territory for a while now, as is evident from a plunge of more than 64% over the past year, underperforming the broader industry’s 45% decline.
Also, the upstream player has declined more than 19% on a year-to-date basis. The stock slipped to a 52-week low of $4.53 in yesterday’s trading session, closing a tad higher at $4.65. While certain concerns relating to the Newfield buyout, weak natural gas prices and takeaway constraints are currently weighing on investors’ sentiments, we believe that the Zacks Rank #3 (Hold) firm still holds much promise and should be retained for long-term prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Aspects That Pushed the Stock to a Tight Spot
The company’s decision to buy fellow oil producer Newfield Exploration has not gone down too well with investors. The deal, which closed early this year, came with a hefty price tag of $7.7 billion, including Encana's assumption of about $2.2 billion of Newfield debt. Apart from increasing its debt load, the all-stock buyout deal led to the issuance of new shares, leading to equity dilution. Further, the buyout added a new region — the STACK shale of Oklahoma — to Encana’s portfolio, which increased execution risks as the company is not much familiar with these assets and can’t apply its learnings in the Permian Basin to this region.
To make matters worse, Encana reported a negative free cash flow of $314 million in the last reported quarter. In light of the debt load of more than $6.3 billion, the company announced dividend hikes and stock buybacks instead of emphasizing more on strengthening financials and cash flows.
As it is, existing pipeline takeaway constraints in the Permian Basin restricted Encana's ability to fully benefit from improving oil prices. Also, natural gas prices, which account for around half of Encana’s output, have been trading below $3 per MMBtu, in turn affecting the company's performance.
Can Strategies and Output Growth Pare Woes?
As we know, the company has successfully re-adjusted the asset base via acquisitions and divestments, transitioning to the more profitable crude over a couple of years. Of late, Encana entered into deals to jettison acreage in the natural-gas heavy Arkoma Basin and terminated the production sharing contract with CNOOC Limited (CEO - Free Report) , thereby exiting China operations. The deals are in sync with the firm’s goals of crude transition and efforts for monetization of non-core assets. Encana is concentrating on optimizing portfolio, and devoting its production spending on core plays and a fewer geographical areas.
Encana — which is riding high on impressive production from core assets namely Permian, Montney and Anadarko — is targeting 15% liquids production growth from core assets, while being within cash flows. The management team expects its cash flow to soar about 300%, with margins doubling over the next five years.
Encana’s low-cost business model is likely to help the company improve returns and emerge successful in the long haul. To its credit, Encana has been able to achieve a massive decline in the operating cost structure. Since 2015, the company has brought down drilling and completion costs in the Montney and Permian by around 25%.
Sporting a Zacks Rank #3, this Calgary, Alberta-headquartered company’s expected EPS growth rate for three-five years currently stands at 7.5%, comparing favorably with the industry's 6.8%.
Wrapping Up
While management is yet to derive financial advantage from the Newfield buyout, the combined entity has undoubtedly emerged as a major player in the unconventional space with enviable production growth prospects. We believe that the company’s bold bet is likely to pay big dividends down the road. Notably, its robust output and cash flow outlook instills confidence. Further, we expect that endeavors like divestments and cost cuts will boost the company’s performance in the forthcoming periods and enable it to return to investors’ good books.
Stocks to Consider
Investors interested in oilfield service stocks can consider Helix Energy Solutions Group, Inc. (HLX - Free Report) and Oceaneering International (OII - Free Report) , each sporting a Zacks Rank #1.
Helix managed to beat earnings estimates in three out of the trailing four quarters, with an average positive surprise of 71.88%. The company’s earnings per share are expected to grow 52.63% y/y in 2019.
Oceaneering surpassed earnings estimates in each of the trailing four quarters, with an average of 49.7%. The company’s top line is expected to grow 12.64% y/y in 2019.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>