Natural gas exploration and production (E&P) company Encana Corporation (ECA) reported mixed fourth quarter 2012 results, primarily reflecting better drilling activities at prime areas such as the Peace River Arch region, Bighorn and Cutbank Ridge acreages and Piceance Basin. These were partially offset by low natural gas volumes and hedging loss.
The company announced operating earnings per share (excluding one-time items) of 40 cents, beating the Zacks Consensus Estimate of 32 cents. Comparing year over year, earnings grew 29.0% from 31 cents.
Revenues (net of royalties) came in at $1,605 million, down 34.8% from the prior-year figure of $2,461 million. But, the result was ahead of our estimate of $1,541 million.
Production & Prices
Fourth quarter natural gas production declined approximately 14.8% year over year to 2,948 million cubic feet per day (MMcf/d), primarily due to a 20.8% drop in volumes in the resource plays of the USA division. Encana's realized natural gas prices increased approximately 4.8% year over year to $5.02 per thousand cubic feet (Mcf).
The company's oil and liquids production climbed 51.5% year over year to 36,200 barrels per day (Bbls/d), aided by a 69.8% improvement in output from the resource plays of the Canadian division. Encana's oil and other liquids were sold at $66.65 per barrel, down 22.0% from the fourth quarter of 2011.
Cash Flows and Drilling Statistics
Encana generated cash flows from operations of $809 million or $1.10 per share against $983 million or $1.33 per share during the December quarter of 2011. The company drilled 177 net wells against 361 in the prior-year quarter.
Capital Spending and Balance Sheet
Encana's capital investments during the quarter were $780 million (excluding acquisitions and divestitures). As of Dec 31, 2012, Encana had cash on hand of $3,179 million and long-term debt of $7,675 million, representing a debt-to-capitalization ratio of 59.2%.
For 2013, Encana expects liquid output around 50,000–60,000 barrels per day and natural gas volumes at 2.8–3.0 billion cubic feet per day. The company also targets investing about $3.0–$3.2 billion in capital projects during the year.
The company currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.
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, we remain optimistic regarding the collaboration of Encana and Mitsubishi in developing the Cutbank Ridge, which is one of the most fertile and low-cost resource-rich acreages in North America. With a large proved undeveloped natural gas reserve, the region is expected to have the capacity of delivering 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.
Meanwhile, there are other E&P companies that are expected to perform well in the coming one to three months. These include Cabot Oil & Gas Corp. (COG) with a Zacks Rank #1 (Strong Buy) as well as Hyperdynamics Corp. (HDY) and Penn Virginia Corporation (PVA) with a Zacks Rank #2 (Buy).
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