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Encana (ECA) to Report Q4 Earnings: What's in the Cards?

Nilanjan Choudhury

Encana Corporation ECA is scheduled to release fourth-quarter 2018 results before the opening bell on Thursday, Feb 28.The current Zacks Consensus Estimate for the quarter under review is a profit of 12 cents on revenues of $1,4 billion.

In the preceding three-month period, the Canadian oil and natural gas producer beat the consensus mark by 30.8% due to increased production along with higher price realizations.

As far as earnings surprises are concerned, the upstream player has an excellent record, having gone past the Zacks Consensus Estimate in each of the last four reports.

Investors are keeping their fingers crossed and hoping that the company can continue winning ways by surpassing earnings estimate this time around too. However, our model indicates that Encana might not beat on earnings in the fourth quarter.

Let’s delve deeper and find out the factors impacting the results.

Factors to Consider This Quarter

We believe that the steady oil price environment amid a favorable shift in Encana’s product mix toward the commodity bode well.

Few years back, natural gas accounted for around 95% of Encana’s output. In the last reported quarter, the figure came down to 53%, chiefly due to a slew of acquisitions and divestitures since 2013 that has repositioned its asset base. The transition to crude – which are generally more profitable to churn out than natural gas because of higher price realizations – is a big positive for the company going into the fourth quarter.

The surge in output (especially from the Permian Basin) should also lead to solid earnings growth. Encana's third quarter Permian output was 98,500 oil-equivalent barrels per day (BOE/d), up a whopping 54% from a year ago. The company’s high-quality, low-cost Permian holdings is likely to generate substantial volume growth in the to-be-reported quarter as well.

However, creeping cost escalation remain an issue as rising outlay might reduce profit margin. Over the first nine months of 2018, Encana saw its operating expense rise almost 33%. We expect this trend to continue that would restrict the bottom line.

Earnings Whispers

Our proven model does not conclusively show that Encana will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, for this company stands at +26.35%. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise.

Zacks Rank: However, Encana’s Zacks Rank #5 (Strong Sell), when combined with a positive ESP makes surprise prediction difficult.

As it is, we caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Encana, here are some firms from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Gulfport Energy Corporation GPOR has an Earnings ESP of +10.05% and a Zacks Rank #3. The company is slated to release earnings on Feb 27. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Denbury Resources Inc. DNR has an Earnings ESP of +14.29% and a Zacks Rank #3. The company is anticipated to release earnings on Feb 27.

Southwestern Energy Company SWN has an Earnings ESP of +6.06% and a Zacks Rank #3. The company is expected to release earnings on Feb 28.

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