Why Encana Is a Buy

Encana (ECA) announced second quarter ended June 30, 2016 total revenue of $196 million, down 13 percent sequentially from $224 million in first quarter of 2016 and a decline of 31 percent year-over-year from $284 million in second quarter of 2015.

Encana Corporation declared second quarter of 2016 net loss of $601 million or $0.71 of diluted loss per share compared to a net loss of $379 million or $0.45 of diluted loss per share in first quarter of 2016 and a net loss of $1.61 billion or $1.91 of diluted loss per share in second quarter of 2015.

The upstream energy company reported continued sequential and year-over-year decline in both its top and bottom lines primarily driven by the ongoing weaker global commodity demand and pricing environment coupled with the rising energy exploration expenditures, continuing to hurt the company’s key margins.

Encana is uniquely delivering superior year-over-year cost performance at the Permian Basin with continued focus on achieving solid capital efficiency.
Hence, Encana is targeting the pacesetting wells that are believed to be a key indicator of prospective expenditures. Further, Encana is driven by superior innovation with structured approach towards testing innovative technologies and concepts. The tried and tested technologies and concepts are then quickly implemented at vast scale including, rapid transfer of successes across portfolios and reliably transforming pacesetter cost control achievements into successive quarterly average performance.

Growing in the right areas

Encana has proved to be an industry-leading operator at the Permian Basin with attractive second quarter of 2016 pacesetting D&C expense of $4.3 million and an average D&C expense of about $4.9 million/well, a decline of 31 percent year-over-year compared to the same period last year. Davidson 14-well altogether is producing over 10,000 BOE/d of total energy production with an expectation of 60 net locations across this pad. Encana is believed to be the second major Midland Basin miner compared to its competitors.

Moreover, the company has strategically concluded its entire vertical retention schedule for complete fiscal year 2016 and uniquely achieving 50% reduction in the expected savings for the year to about $25 million. Still, Encana has approximately 100 locations left to popularize this program by continually changing retention wells to horizontals in 2017 and beyond.

The solid cost-optimization initiatives of Encana is believed to deliver sustainable long-term company growth while allowing it to save the much needed cash for making strategic prospective growth investments coupled with delivering sustainable and attractive shareholder returns.

Encana has strategically raised the fiscal year 2016 investment guidance in the range of $1.1 billion to $1.2 billion from the earlier projected 2016 capital investment guidance in the range of $900 million to $1 billion by uniquely lowering the cash expenses by approximately $100 million or 11% reduction in operating expenditure guidance along with 5% reduction in T&P guidance. Going forward, Encana seems keenly focused on delivering continued cost betterment at Eagle Ford with recent pacesetting D&C expense of $3.0 million, 8.5 attractive Pacesetting drilling days and an average D&C expense of about $3.9 million/well during second quarter of 2016, a decline of 38 percent year-over-year over the same period last year while minimizing expenditures and expanding productivity.

Conclusion

Overall, the investors are advised to “Hold” their position in Encana Corporation considering the company’s significant long-term growth prospects but, currently weaker financial position with significant total debt of $6.03 billion against weaker total cash position of $293 million only, restricting the company to continue with its daily operations profitably. The profit margin of -81.73 is disappointing and signifies no profit but loss. The PEG ratio of 0.36 appears misguiding and depicts poor company growth.
Published on Sep 26, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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