Stock Analysis: Encana Corporation (ECA)

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

On Thursday Encana announced their second quarter results for 2014. The results had both positives and negatives to it.  The negatives, primarily was that they missed the analyst earnings estimates of $0.25 and were just under the $1.6 Billion revenues mark (it would round to be in line with expectations).  On the positive side, the company is executing well and are reaching targets well in advance of expectations.  Free cash flow to help solidify the balance sheet has taken the most attention to the space as the company boosted guidance on free cash flows on the year from $2.9 - $3.0 Billion to $3.4 - $3.6 Billion.  This is a significant boost and are results from the sales of some gas positions and the purchase of their Eagle Ford assets which completed in late second quarter.  They still have $1.8 Billion in asset sales to complete in the third quarter and this will help put the company in a position where they are flush with cash.

The increased cash positions are just a part of the story.  There's a lot of unexpected growth in both the liquids plays as well as the base gas plays the company continues to operate.  Liquids grew by 49% year over year whereas gas increased by 38% with less than 20% of capital investments going to these plays.  To me, that increase in the gas plays is the larger win.  They're producing more with very little investments and their margins are increasing.  This is the type of direction you'd like to see a company take during a turn-around and they're doing it much faster than anticipated.  These all show signs of a management team that is able to execute and is beginning to give me confidence the move and growth can continue.

This is now the second quarter in a row that the company had strong results in terms of their strategy.  However, the financial results weren't quite where they should be either.  Some of the miss is surely in relation to deals that closed over the quarter, so I can give them a little bit of a pass on this one.  I'm not ready to change my earnings goals or stock target at this point, though.  My estimates are staying at full year earnings of $1.50 and a stock price target of $25 (ok, so actually this moved up a dollar) which is just under 17 times 2014 earnings.  I don't have enough visibility to give a 2015 target yet.  With this, I continue to rate the stock a three.  Currently, the stock is suffering from commodity pressures as the price of natural gas are down.  With the company balancing out oils and gases, these impacts should lessen over time, for now, though, it will have to pull back some more and show some signs of commodity stabilization before I can upgrade the stock.