Stock Analysis: Encana (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.
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.
Yesterday, Encana announced their third quarter 2014 earnings. Operating earnings came in at $0.38, below the $0.42 estimates I had found. Additionally I believe the earnings estimates I had found of $1.7B were met. I've struggled to find the comp number since it doesn't seem to be a straight up Revenues comparison. The number I found to be most likely was $1.7B. All other numbers were much higher and if those are the normal comparable numbers, you see an increase due to the sales/purchases the company has been making over this time. Based upon how this company likes to report, I get the feeling I should be watching free cash flow instead. I'll assess and make adjustments accordingly in the future. So based upon numbers alone, the quarter was a miss. However, I would attribute most of the earnings miss to be due to all of the transaction work going on. Forward guidance seems to be on par for what they've been estimating for awhile now on Free Cash Flow terms. They are delivering these numbers on less capital spend as they pour more money into their greatest growth assets. From a process standpoint, they're 2 years ahead of schedule on their plans to turn the company around. In most terms, this should be good news. It's hard to deny the company appears to be increasing margins, increasing cash flow, and strengthening their balance sheet like they said they would.
The downside to this company, at least right now, is the fact that they've announced plans to put much more capital expense to their plans next year to increase production in their high margin plays at a time that Oil has plummeted. They've made comments that their balance sheet is well prepared and will profit will when oil is at $80-85. Problem is WTI Crude is currently below $75. While they did say they would lower that spend "if the bottom fell out," seeing/hearing about increased production in a low-value market is a bit unnerving now, though if prices increase, it would probably be a well executed move and it would be good to see the company is in the financial position to make that move. It was also clearly stated that they only are hedging short term to protect that balance sheet. This means they don't have a lot of hedging in place to get higher prices in the future to protect to the downside. Unlike pure oil companies, though, is the fact that this is still a majority gas company. Gas prices are strong, weather is also favorable for now to keep it strong. While they've shifted to more oily focus, the gas will help provide some buoyancy while the prices hold. It's hard not to feel like this is a bit reminiscent of 2010 - 2012, but this time around there does appear to be the acute balance sheet attention that you want in a high quality management.
In all honesty, I struggle with short term vs. long term with this stock. Truth is I believe the management team is doing the right things to turn the company around and position themselves correctly. That being said, short-term this company is in an awful sector. Energy isn't where you want to be and my portfolio has too much. Also compared to another stock I have, I don't have as much upside potential here. Analysts estimate 2014 earnings of $1.69. That puts the stock at a little over 10 times earnings. Earnings and cash flow are growing, however, there's also a lot of risk of decreased earnings going forward. This is similar behavior I'm seeing with other energy stocks. I still don't have enough to estimate what I think next year will look like. And truthfully, whatever I estimate can quickly change due to shifts in oil/gas prices. Let's say the company has no growth next year. Even at earnings of $1.69, it seems this stock has sold off too much. We're only about $0.70 off of the stock's all-time lows and that was with a mostly gas production where prices were half of what they are today. I don't see a point in selling this stock at these prices short of I need to get rid of losers to raise cash. Since this isn't my first stock I'd choose to release, I'm going to rank the stock a 3. I'm going to estimate 2015 earnings at $1.69 for now and give a multiple of about 14 if this is the new normal. That puts my price target at $23.50. These are tough times for the energy sector. It's really hard to say if this is a new normal or if prices will rebound. Part of the prediction of direction will be dependent upon what OPEC decides to do in their meeting on November 27. Watch that, watch oil prices, but don't watch this stock too closely, yest you end up bailing at the bottom. If you're thinking of buying, don't. There will be a better time when we have more to go off of - even if the price is a little higher than here.
The downside to this company, at least right now, is the fact that they've announced plans to put much more capital expense to their plans next year to increase production in their high margin plays at a time that Oil has plummeted. They've made comments that their balance sheet is well prepared and will profit will when oil is at $80-85. Problem is WTI Crude is currently below $75. While they did say they would lower that spend "if the bottom fell out," seeing/hearing about increased production in a low-value market is a bit unnerving now, though if prices increase, it would probably be a well executed move and it would be good to see the company is in the financial position to make that move. It was also clearly stated that they only are hedging short term to protect that balance sheet. This means they don't have a lot of hedging in place to get higher prices in the future to protect to the downside. Unlike pure oil companies, though, is the fact that this is still a majority gas company. Gas prices are strong, weather is also favorable for now to keep it strong. While they've shifted to more oily focus, the gas will help provide some buoyancy while the prices hold. It's hard not to feel like this is a bit reminiscent of 2010 - 2012, but this time around there does appear to be the acute balance sheet attention that you want in a high quality management.
In all honesty, I struggle with short term vs. long term with this stock. Truth is I believe the management team is doing the right things to turn the company around and position themselves correctly. That being said, short-term this company is in an awful sector. Energy isn't where you want to be and my portfolio has too much. Also compared to another stock I have, I don't have as much upside potential here. Analysts estimate 2014 earnings of $1.69. That puts the stock at a little over 10 times earnings. Earnings and cash flow are growing, however, there's also a lot of risk of decreased earnings going forward. This is similar behavior I'm seeing with other energy stocks. I still don't have enough to estimate what I think next year will look like. And truthfully, whatever I estimate can quickly change due to shifts in oil/gas prices. Let's say the company has no growth next year. Even at earnings of $1.69, it seems this stock has sold off too much. We're only about $0.70 off of the stock's all-time lows and that was with a mostly gas production where prices were half of what they are today. I don't see a point in selling this stock at these prices short of I need to get rid of losers to raise cash. Since this isn't my first stock I'd choose to release, I'm going to rank the stock a 3. I'm going to estimate 2015 earnings at $1.69 for now and give a multiple of about 14 if this is the new normal. That puts my price target at $23.50. These are tough times for the energy sector. It's really hard to say if this is a new normal or if prices will rebound. Part of the prediction of direction will be dependent upon what OPEC decides to do in their meeting on November 27. Watch that, watch oil prices, but don't watch this stock too closely, yest you end up bailing at the bottom. If you're thinking of buying, don't. There will be a better time when we have more to go off of - even if the price is a little higher than here.
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