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Encana (ECA) to Gain From Output Growth, Maintains 2019 View

Zacks Equity Research

Encana Corporation ECA has been riding high on impressive production from its core assets namely Permian, Montney and Anadarko. Notably, the company delivered the sixth consecutive earnings beat in the last reported quarter on the back of robust output growth. Recently, Encana provided an update on second-quarter-to-date production, underscoring strength of operations.

Production Growth to Drive Performance

The company expects second-quarter output within 585-595 thousand barrels of oil equivalent per day (MBOE/d), higher than 338 MBOE/d and 566.6 MBOE/d recorded in the year-ago period and the last reported quarter, respectively.

A few years back, natural gas accounted for around 95% of Encana’s output. However, the company successfully repositioned the asset base via acquisitions and divestments, which will aid its transition to the more profitable crude over a couple of years. Markedly, the firm expects liquids to account for 54% of the total output in the second quarter.

Encana’s liquid production so far in the second quarter averaged 320,000 barrels per day (bbl/d), higher than the 292,700 bbl/d in the last reported quarter. Strong well performance in the STACK play of the Anadarko Basin, and increased output from Permian and Montney will drive production growth of the company in the quarter.

Driven by higher year-over-year liquids production and prices, its earnings and cash flows are poised to grow further.The company is targeting 15% liquids production growth from its core assets namely Permian, Montney and Anadarko, while being within cash flows. The management team expects cash flow to soar about 300%, with margins doubling over the next five years. 

Other Key Updates

The Canadian energy behemoth reiterated its 2019 capex and output guidance. The company expects capital spending in the band of $2.7-$2.9 billion. Full-year production is anticipated within 560-600 MBOE/d.

In another update provided by the company, Encana is terminating the production sharing contract with CNOOC Limited CEO — exiting China operations — in a bid to optimize portfolio. The transaction is in line with the company’s strategy of streamlining its portfolio through the sale of non-core assets, which can help it to focus its production spending on core plays and fewer geographical areas. Subject to satisfactory closing conditions, the deal is set for closure by the end of next month.

As we know, Encana, which is committed to return cash to its shareholders, has a $1.25 billion worth of share buyback program underway. Since the commencement of the share repurchase program in March 2019, the company has already bought back $1.037 billion worth of shares so far. Notably, it intends to purchase additional $213 million shares next month, in a bid to complete the buyback program.

Zacks Rank & Other Stocks to Consider

Encana currently carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the same industry include Canadian Natural Resources Limited CNQ and Crescent Point Energy Corporation CPG, each holding a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Canadian Natural’s 2019 earnings are likely to grow12.68% year over year.

Crescent Point’s 2019 earnings growth is projected at 9.09%.

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