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Here's Why Encana (ECA) is a Hot Investment Pick Right Now

Zacks Equity Research

Encana Corporation ECA looks compelling at the moment. Given the company’s strong fundamentals, it seems this is the apt time to add the stock to investors’ portfolio.

Based in Calgary, Alberta, Encana is a leading North American oil and natural gas exploration and production (E&P) company. Following its $7.7 billion acquisition of Newfield Exploration Company, this upstream operator has successfully repositioned its asset base and shifted focus to three key growth areas or its Core 3 liquid plays, namely Permian, Anadarko and Montney.

Notably, the company currently has a Zacks Rank #2 (Buy), which means that it is poised to outperform its market. Let’s delve deeper intoanalyzingfactors that make this upstream energy player an attractive investment option at the moment.

Production Mix

A few years back, natural gas accounted for around 95% of Encana’s output. However, the company successfully re-adjusted its asset base via acquisitions and divestments, transitioning to the more profitable crude over a couple of years. In the latest quarter, natural gas contributed to just 48% of the total production. The transition to crude — which is generally more profitable to churn out than the natural gas because of comparatively higher price realizations, is a big positive for the company going forward. Driven by higher year-over-year liquid production and prices, Encana's earnings and cash flows are poised to grow.

Moreover, the company is targeting 15% liquid production growth from its core assets namely, Permian, Montney and Anadarko while being within its cash flows. The management also expects its cash flow to skyrocket about 300% with its margins doubling over the next five years. 

Newfield Acquisition

The purchase of Newfield Exploration is likely to transform Encana into one of the leading unconventional energy producers. Apart from creating a major player in the unconventional space with enviable production growth prospects, the buyout is expected to result into annual G&A synergies of at least $150 million. 

Strong Cost Structure

Encana’s low-cost business model is likely to help the company improve returns and be successful in the long haul. To its credit, Encana has been able to achieve a massive decline in the operating cost structure, primarily supported by Anadarko Basin operations. Moreover, since 2015, the company has brought down drilling and completion (D&C) costs in the Montney and Permian by around 25%. This enables it to reap profits even when the commodity price realization is at the lower end of the expectations.

Shareholder Value Increase

Encana is committed to returning cash to its shareholders. The company’s first-quarter 2019 dividend represented a 25% hike, boosting investors’ confidence in the stock. Per the company’s May 21 presentation, it bought around 91 million shares year to date. Further, the company also has a $1.25-billion worth share buyback program underway.

All the factors stated above make the stock a rewarding one. But one should consider its estimate revisions and earnings history along with operational strength to understand its true potential.

Earnings Record & Growth Prospects

In the last reported quarter, Encana delivered operating earnings of 14 cents per share, outperforming the Zacks Consensus Estimate of 10 cents on the back of increased production volumes and higher oil price realizations. The metric beat estimates in all the trailing four quarters, pulling off average positive surprise of 77.3%.

Encana Corporation Price and EPS Surprise

Encana Corporation Price and EPS Surprise

Encana Corporation price-eps-surprise | Encana Corporation Quote

The Zacks Consensus Estimate for second-quarter earnings of 20 cents has witnessed three upward revisions by brokers in the past 30 days. Clearly, this energy stock has a substantial room for rally.

Other Stocks to Consider

Some other top-ranked players in the energy space are Apache Corporation APA, Hess Corporation HES and Holly Energy Partners, L.P. HEP. While Apache sports a Zacks Rank #1 (Strong Buy), Hess and Holly Energy hold a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.  

Apache’s earnings beat estimates in all the trailing four quarters, the average being 31.1%.

Hess’ earnings are expected to soar more than 130% through 2019.

Holly Energy’ earnings growth is projected at 6.5% through 2019.

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Encana Corporation (ECA) : Free Stock Analysis Report
 
Holly Energy Partners, L.P. (HEP) : Free Stock Analysis Report
 
Apache Corporation (APA) : Free Stock Analysis Report
 
Hess Corporation (HES) : Free Stock Analysis Report
 
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