Stock Analysis: Encana Corporation (ECA)
Notes:Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash. Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.
Today, Encana announced their first quarter earnings for 2014. I have been showing a lot of skepticism for the rise in the stock price that has happened since the start of 2014 and of the leadership of Doug Suttles. Today, I'd say I was put in my place and as a shareholder, I'm happy to be in that position. I don't think Encana could've delivered a better quarter. They beat earnings - turning expected losses for the quarter into a nice profit, they beat on their revenues and cash flow, and they've raised guidance. Revenue growth is accelerating. The company strategy, which started just back in November, appears to be reaping mightily at this point.
Operating earnings (which E&P companies are usually measured on), were 70 cents compared to the analyst average of 54 cents was a serious butt kicking. Cash flow was at 1.1B or $1.48 per share. It should be noted that some of these gains are due to increased natural gas prices as well as cost-cutting efforts (layoffs), but these gains are also a result of great production out of their nat gas liquids and more oily plays as production for nat gas slowed by about 2 percent. The quarter results did not include the purchase of the acreage in the Eagle Ford play (announced just last week), and did include the $1.8B sale of their Jonah play. With the cash flow they put together this quarter, it's easier to understand why they made the Eagle Ford purchase and how they can manage to do the deal in all cash without impacting what they said they'd deliver. Clearly management is confident in the direction things are heading, they're following their strategy closely and balancing the portfolio while assuring they're staying a low cost producer. I'm somewhat surprised to learn they didn't hedge more of their Nat gas production for this year or next. This could be a sign that they expect higher prices, though. This does create some down side risk, but with such a focus in higher margin liquids plays, I believe they're positioning themselves to be prepared, should prices start to suffer again. The other thing that bothered me was that the stock was not able to hold strong gains in a tape which included new highs for the DJIA.
My Stock Ownership Plans:
While this quarter takes my breath away, I don't want to get overly exuberant. Yes, it appears we're getting higher margin production, better revenues and cash flows, and are generating earnings and profits much faster than expected. Truly a great quarter that the management team should be proud of. At the same time, it's only 1 quarter with such positive results (though I will willingly admit they beat expectations last quarter as well). As such, I'm raising my operating earnings outlook for the company to $1.50 from my previous $1.25 projection. I believe this projection to be conservative, considering that after one quarter they already have almost half of those earnings in place, but I believe it will take some continued performance before analysts really start getting behind this turn-around. With my projection, I also raise my target price to $28.50, which reflects an industry average PE ratio of 19 times projected earnings. Finally, due to my increased target, I also raise this stock from a 2 to a 1. While there is down side risk, I believe there is much more upside to this stock with the reputation the management team is creating. The target price is over a 20% increase from where the stock closed today and I just don't see that kind of down side risk. This stock has a pretty heavy weight in my portfolio already, so the only way I'd likely buy more is with a cash infusion to the portfolio.