We are maintaining our Neutral recommendation on Encana Corporation (ECA), reflecting its diverse and richquality portfolio of natural gas assetsalong with well-designed investment program. However, the current unfavorable macro backdrop (weak natural gas prices) remains an overhang on the stock.
Headquartered in Calgary, Alberta, Encana is one of the largest natural gas companies in North America with operations spread over Canada and the U.S. The company boasts of a large inventory of reserves and a resource base capable of robust production growth.
During the first three months of 2012, Encana performed impressively, buoyed by higher production and gains from a shift toward liquids output while cutting on natural gas production in response to decade-low prices.
We appreciate Encana’s strategy of renovating its commodity mix from pure natural gas to both liquids and gas. With a clouded natural gas scenario in North America, the company targets to direct almost 55% of its capital investment toward liquids plays in 2012. We believe that Encana will be able to achieve its oil production target for the year, helped by extensive and fast-growing activities (planed to drill almost 40 to 45 assessment wells in the first half of 2012) in the rich oily plays.
Encana has also adopted a disciplined approach toward capital investment and project execution. The company, with a proficient and expert manpower, aims to invest in ventures that will likely generate high returns in the future. Management also remains highly focused on streamlining its cost structure and improving capital efficiency.
However, the current unfavorable macro backdrop of weak natural gas prices remains our concern. Encana remains highly exposed to this gas price fluctuation and will likely experience a drop in sales and earnings in the coming months, unless it is able to cope up with the volatility.
Additionally, the growing popularity of renewable sources of energy, such as wind and solar, also poses as a major threat to natural gas operators. Although expensive, many customers are opting for this sustainable source of energy for its environmental friendly nature.
Other factors that prevent us from being too optimistic on Encana are operational hindrances, challenging market prices and cost inflation.
Considering these aspects, we expect the company to act at par with other industry players such as Canadian Natural Resources Ltd. (CNQ) and Talisman Energy Inc. (TLM). Encana shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.Read the Full Research Report on TLM
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