EnCana Net Drops Less Than Expected

EnCana Corporation (ECA: 31.91 +0.41 +1.30%) – Canada’s largest natural gas producer – reported solid fourth quarter results, helped by higher-than-expected volumes and lower costs. Operating earnings per share, stripping out one-time items, came in at 50 cents, which were 6 cents above the Zacks Consensus Estimate.
 
Estimate Revisions Trend
 
EnCana’s quarterly earnings outperformance becomes even more impressive in the context of the recent downward revisions to its fourth-quarter estimates. Earnings estimates were trending down over the past month, with the quarterly Zacks Consensus Estimate going down by 27 cents (from 77 cents to 44 cents). Overall, 4 of the 11 analysts covering the stock pulled back on projections during that time, with no upward revisions.
 
With respect to earnings surprises, this was the company’s third positive earnings surprise in the past four quarters. EnCana has performed well during this period, with its average earnings surprise being 27.5%. This implies that the company has exceeded the Zacks Consensus Estimate by 27.5% over the last four quarters.
 
Year-over-Year Comparisons Down
 
In the year-ago period, EnCana earned 73 cents. Revenues (net of royalties) were down 44.2% year over year to $2.7 billion. The negative comparisons were on account of low natural gas prices that hit their lowest levels in seven years during the last quarter of 2009.
 
During the quarter, total production was down 10.8% to 2,831 million cubic feet equivalent per day (MMcfe/d), of which 95% was natural gas. Natural gas volumes decreased roughly 9.8% year-over-year to 2,687 million cubic feet per day (MMcf/d), while oil and natural gas liquids (NGLs) production was down 27.3% to 24 thousand barrels per day (MBbls/d).
 
Key Resource Plays
 
Production of natural gas from key resource plays was down approximately 10.8% year-over-year to 2,831 MMcfe/d, primarily due to an 11.4% fall in natural gas production (from 2,513 MMcf/d in the fourth quarter of 2008 to 2,226 MMcf/d).
 
Gas volumes suffered from the decision to shut in some wells, restrict productive capacity and delay some well completions or tie-ins to sales pipelines because of lower natural gas prices. However, EnCana continues to see improved operational performance and strong initial production rates from its Haynesville shale gas play and Horn River basin. Realized natural gas prices during the quarter were down approximately 12.1% year-over-year to $6.44 per Mcf.
 
Cash Flows & Drilling Statistics
 
EnCana generated cash flows from operations of $930 million or $1.24 per share, down from $1.5 billion or $2.00 per share during the December quarter of 2008. The company drilled 295 net wells during the quarter, compared to 602 wells in the prior-year period.
 
Capital Spending & Balance Sheet
 
EnCana’s capital investments during the quarter were $1.4 billion (excluding acquisitions and divestitures). At the end of 2009, EnCana had cash on hand of $4.3 billion and long-term debt of $7.7 billion, representing a debt-to-capitalization ratio of 31.9%.
 
Guidance
 
The company said that it expects full-year 2010 production to be in the 3,200 – 3,300 MMcfe/d range, while capital spending is likely to between $3.6 billion and $3.9 billion.