A month has gone by since the last earnings report for Encana (ECA). Shares have lost about 0.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Encana due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Encana Q4 Earnings Beat on Robust Output Growth
Bringing in pleasant news for investors, Encana managed to maintain its earnings-beat streak in the fourth quarter of 2018 on the back of increased production volumes and higher commodity price realizations.
The Canadian oil and natural gas producer reported fourth-quarter 2018 operating earnings per share of 32 cents, outperforming the Zacks Consensus Estimate of 12 cents. The bottom line also improved from the year ago income of 12 cents a share.
Moreover, quarterly revenues of $2,381 million increased 98% from fourth-quarter 2017 sales of $1,210 million. Further, the top line surpassed the Zacks Consensus Estimate of $1,400 million.
Production and Prices
A few years back, natural gas accounted for around 95% Encana’s output. However, the company successfully repositioned its asset base and transitioned to the more profitable crude over a couple of years.Notably, in the quarter under review, natural gas accounted for 52.3% of its total production. Production growth from its core assets—Permian, Montney, Eagle Ford and Duvernay—enabled the firm to deliver impressive year-over-year results.
Total fourth-quarter production came in at 403,400 barrels of oil equivalent per day (BOE/d) compared with 335,200 BOE/d in the prior-year period. Natural gas production increased 15% year over year to 1,265 million cubic feet per day and liquids production rose 26% to 192.7 thousand barrels per day.
Encana's realized natural gas price was $2.64 per thousand cubic feet compared with the year-ago level of $2.34. Further, realized oil price rose to $56.54 per barrel from $52.94 in the fourth quarter of 2017.
Total Costs & Capex
Total operating expenses increased to $1,027 million from the year-ago figure of $948 million. The rise is primarily attributed to an increase in depreciation and transportation charges, along with higher purchased products costs.
Encana's capital investments during the quarter were $349 million. In the full year, capex amounted to $1,975 million.
Dividend Hike, Reserve Growth
Boosting investors’ confidence, Encana hiked its quarterly dividend by 25%. The company declared a dividend of 1.875 cents per share (versus previous payout of 1.5 cents), payable on Mar 29 to its shareholders of record as of Mar 15.
On a further encouraging note, the company’s proved reserves totaled 1,215.7 million barrels of oil equivalent (52% liquids) as of Dec 31, 2018, marking 53% growth on a year-over-year basis.
Cash Flow and Balance Sheet
Encana’s cash from operating activities in the quarter under review came in at $559 million, recording an increase from the year-ago figure of $369 million. This helped the company generate $191 million of free cash flow.
As of Dec 31, 2018, cash and cash equivalents were $1,058 million, and long-term debt was $3,698 million. The debt-to-capitalization ratio came in at 33.2%.
For full-year 2019, Encana foresees capital expenditure at around $2.7-$2.9 billion versus $1.97 billion in 2018. About 75% of its capital outlay is likely to be directed toward the firm’s three core plays, i.e. Permian, Montney and Anadarko. Liquids output from these core plays is expected to grow 15% on a year-over-year basis in 2019. With liquids likely to account for more than half of the company’s total production in 2019, volumes are expected in the range of 300,000-320,000 barrels per day. Total output of the company is expected within 560,000-600,000 BOE/d.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -48.21% due to these changes.
At this time, Encana has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Encana has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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