March 2, 2016
Encana Corporation
(ECA - NYSE)
$4.59
Note: This report contains substantially new material. Subsequent reports will have changes highlighted
Reason for Report: 4Q15 Earnings Update
Prev. Ed.: Dec 17, 2015; 3Q15 Earnings Update (broker material considered till Dec 10, 2015)
Brokers’ Recommendations: Positive: 47.1% (8); Neutral: 47.1% (8 firms); Negative: 5.8% (1)
Brokers’ Target Price: $7.03 (↓ $4.16 from the last edition; 14 firms)
Prev. Ed.: 11; 7; 0
Brokers’ Avg. Expected Return: 53.2%
NOTE: Though dated Mar 2, 2016, broker materials are as of Feb 29, 2016.
Note: A Flash Update was done on Feb 24, 2016; 4Q15 Earnings Release
Note: We did not have access to the reports from the brokers having the Sell recommendation on the stock
Portfolio Manager Executive Summary
Encana Corporation (ECA) is a North American energy company with major focus on unconventional
natural gas. It is a technical and cost leader in the in-situ recovery of oilsands bitumen. Partnering with
employees, community organizations, and other businesses Encana contributes to the strength and
sustainability of the communities where it operates.
Of the 17 firms in the Digest group covering the stock, 8 firms provided neutral ratings, 8 firms
conferred positive ratings and one of the firms assigned a negative rating to the stock. The firms
provided the lowest target price of $4.00 (12.9% downside from the current price) and a highest target
price of $17.00 (270.4% upside from the current price), with the average price being $7.03.
The following is a summarized opinion of the diverse brokerage viewpoints:
Neutral or equivalent (47.1%; 8/17 firms): These firms expect Encana to provide adequate returns to
investors through its ability to control costs effectively and drive growth through its increased focus on
liquid-linked assets. On the other hand, Encana will likely command a premium multiple compared with
its peers with a large inventory of gas resource properties and excellent financial flexibility.
However, the neutral firms believe that the company’s shift toward liquid-linked assets is still in the early
stage and near-term cash flow growth is not in the cards. Moreover, lower capital spending on dry
natural gas programs will likely lead to lesser natural gas output, thereby hurting the company’s overall
volume of production.
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Positive or equivalent (47.1%; 8/17 firms): The bullish firms are confident of the company’s strong
portfolio of rich resource base and unconventional natural gas asset base. These firms expect Encana
to remain focused on improving operating efficiency and optimizing operating costs by – reduced
drilling time, long-term service contracts and effective logistics management.
Encana’s decision to invest in oil rich assets like Montney, Duvernay, Eagle Ford and Permian basin
will help it generate stable revenues in the long run.
Mar 2, 2016
Overview
The firms identified the following factors for evaluating the investment merits of Encana:
Key Positive Arguments
Compelling Fundamentals
 Strong operating team.
 Strong liquidity position, balance sheet and
increased dividend.
 Pure play on North American unconventional
assets.
 Large inventory of drilling opportunities.
 Competitive cost structure.
 Cycle times for drilling improvement.
 Moderating overall cost in the oil and gas
business with the availability of more oil field
service.
 Favorable hedging contracts.
Growth Opportunities
 Large, geographically-diversified
resource plays.
 High organic growth rates.
portfolio
of
Key Negative Arguments
Fundamental Issues
 Production risks related to an unexpected decline
in output from its major properties.
 High dependence on North American reserves and
production
makes
Encana
vulnerable
to
retrenchment in gas prices.
 Oil sands development is a high-cost and
expensive proposition with long lead times.
Macro Issues
 Sluggish recovery of the economy.
 Changes in natural gas prices.
 Uncertain weather conditions associated with
natural gas exploration and development.
 Encana has considerable exposure to changes in
the Canadian/U.S. currency exchange rate.
 Hydrocarbon prices have become increasingly
volatile in the recent years.
Based in Calgary, Alberta, Encana Corp. (ECA) is a leading North American natural gas producer that
is focused on growing its strong portfolio of prolific shale and other unconventional natural gas
developments, called resource plays, in key basins from British Columbia to east Texas and Louisiana.
By partnering with employees, community organizations and other businesses, Encana contributes to
the strength and sustainability of the communities where it operates. Encana’s common shares trade
on the Toronto and New York stock exchanges under the symbol “ECA”. For more information about
the company, please visit its website www.Encana.com. Encana operates on a calendar-year basis.
On Nov 30, 2009, Encana completed its transaction to split into two highly focused energy companies:
Cenovus Energy Inc., an integrated oil company and Encana Corporation, a pure play natural gas
company.
Mar 2, 2016
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Long-Term Growth
The firms expect the combination of the company’s U.S. and Canadian assets, particularly the
Haynesville, Montney, and Horn River assets to drive long-term growth due to the combination of
increasing economies of scale and a more attractive fiscal regime in Alberta.
The firms appreciate Encana’s significant inventory of drilling opportunities, integrated oil sands
business, long-term fundamentals of natural gas, and its strong management team. They believe that
the company is one of the best positioned corporations to deal with the uncertain market conditions,
given its sound capital structure, robust hedging program that should result in stable cash flow
generation, and low cost asset base.
Management is continually seeking new ways to strengthen the company’s financial position, including
cost-reduction initiatives, project reviews throughout the year, and exploring and implementing
operational efficiencies across its business lines. According to management, Encana’s low-risk, lowcost resource play business model provides financial resilience and positions it well for dealing with the
economic downturn. Management pointed out that it can apply an even higher level of scrutiny and fine
tune investments in order to target optimal project returns and long-term value creation.
The firms expect Encana to reap significant benefits from the Cutbank Ridge, which is one of the most
fertile and low-cost resource rich acreage in North America. With large proved undeveloped natural gas
reserves, the region is expected to have the capacity of delivering long-term, affordable energy supplies
to the domestic and overseas markets.
Encana is gradually shifting focus on liquid-linked growth and is thus transitioning its portfolio to include
high-margin liquid assets. The company targets growth from the promising Montney, Duvernay, Eagle
Ford, DJ basin, San Juan basin, and Tuscaloosa marine shale plays. The firms expect this move to be
value accretive for the company.
Mar 2, 2016
Target Price/Valuation
Provided below is the summary of valuation and ratings as compiled by Zacks Digest:
Rating Distribution
Positive
47.1%↓
Neutral
47.1%↑
Negative
0.0%
Average Target Price
$7.03↓
Digest High
$17.00
Digest Low
$4.00↓
Number of Firms with target price/ Total
14/17
The major impediments to the target price include oil and natural gas price volatility, below-average
returns on capital employed, execution and cost risk, and potential delays of planned asset sales.
Other risks include growth risk, geo-political risk and currency risk.
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Recent Events
On Feb 24, 2016, Encana reported better-than-expected fourth-quarter 2015 earnings on improved
crude volumes. The exploration and production company reported operating earnings per share of
$0.13 compared with the Zacks Consensus Estimate of a breakeven. The bottom line also compared
favorably with the year-ago quarter earnings of $0.05 per share.
Quarterly revenues (net of royalties) came in at $1,031 million, which lagged the Zacks Consensus
Estimate of $1,144 million. Moreover, the top line plunged 54% from the prior-year figure of $2,254
million. Lower natural gas volumes and weak oil and gas prices hampered the results
Revenue
Quarterly Summary
The company reported total revenue of $1,031 million in 4Q15, down nearly 54.3% from the prior-year
figure of $2,254 million.
Production
In 4Q15, natural gas production declined 16% year over year to 1,571 million cubic feet per day
(MMcf/d).
The company's oil and liquids production surged 36% year over year to 145,000 barrels per day on
strong contribution from the Montney, Duvernay, Eagle Ford and Permian shale plays.
Realized Prices
In 4Q15, Encana's realized natural gas prices were $3.43 per thousand cubic feet, lower than the
year-ago quarter level of $4.16.
Encana sold liquids at $39.11 per barrel, down from $66.40 per barrel during fourth-quarter 2014.
Hedges
As of Feb 19, 2016, Encana hedged expected natural gas output of 740 MMcf/d for the Mar to Dec
period of 2016, at an average NYMEX price of about $2.76 per Mcf. Moreover, 54,000 barrels per day
(Mbbls/d) of expected oil production was hedged at $56.33 per barrel in the Mar to Dec 2016 period.
Proved Reserves
As of end-2015, Encana had almost 1.1 billion barrels of oil equivalent (BBOE) in proved reserves, of
which roughly 64% was natural gas. The company’s proved reserve level as of 2015-end was down by
17% from the year-earlier level.
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Guidance
Encana has set $900 million–$1 billion as its 2016 capital expenditure budget, a 55% decrease from
the 2015 outlay and below the previously announced range of $1.5–1.7 billion.
For 2016, the company expects total natural gas output in the 1,300–1,400 MMcf/d band. Liquid
production is anticipated to range between 120 MBbl/d and 130 MBbl/d. Total production is expected to
be around 340 MBOE/d to 360 MBOE/d.
Outlook
Being primarily a natural gas producing company, Encana is now planning to invest more on oil
producing assets like Montney, Duvernay, Eagle Ford, DJ basin, San Juan basin, and Tuscaloosa
marine shale. The bullish firms expect the company to benefit from this move in the long term.
However, some firms expect a decline in production volumes in the upcoming quarters as higher liquid
production will likely be marred by lower natural gas volumes.
Margins
Per the company, production and mineral taxes totaled $31 million in 4Q15 compared with $61
million in 4Q14.
Transportation and processing expenses decreased to $298 million in 4Q15 from $354 million in
4Q14.
The company’s depreciation, depletion and amortization (DD&A) expenses were $276 million in 4Q15,
lower than $451 million in 4Q14.
Outlook
The bullish firms expect to see increased operating margins in the coming years. This is because the
company is a lower-cost producer in comparison with its peers. Its focus on oil-linked acreage should
also improve margins. Moreover, Encana has achieved cost improvements across all its four main
plays – Permian, Eagle Ford, Duvernay, and Montney.
Earnings per Share
Per the company, operating profit was $111 million in 4Q15 against $35 million in 4Q14. Operating
earnings per share was $0.13, against earnings of $0.05 in 4Q14.
Outlook
The bullish firms appreciate Encana’s plan to focus more on oil producing resources, as an extensive
natural gas exposure raises its sensitivity to gas price fluctuations compared with its more diversified
independent peers with higher oil production. Moreover, these firms believe that better cost-control
methods and higher production growth should lead to improved earnings for the company. Narrowed
geographical focus should aid profitability as well.
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Capital Structure/Solvency/Cash Flow/Governance/Other
Financials
Encana's capital investments during the quarter totaled $280 million. As of Dec 31, 2015, cash and
cash equivalent was $271 million and long-term debt was $5,363 million. This represents a debt-tocapitalization ratio of 46.5%.
Mar 2, 2016
Research Analyst
Nilanjan Banerjee
Copy Editor
Parijat Sen
Content Ed.
Nilanjan Choudhury
Lead Analyst
Nilanjan Choudhury
QCA
No. of brokers reported/Total
brokers
Reason for Update
Nilanjan Choudhury
Zacks Investment Research
14/17
4Q15 Earnings Update
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