Numbers do not look bad at all with all sorts of potential to suprise on the upside and they view these levels as a buying opportunity. I could not copy the whole PDF file over but did copy their numbers and key points over.


 

FY Dec           2011A   2012A    2013E     2014E

EPS (Op) - FD 0.54    1.35         1.02         1.56

Prev.                              1.40         1.21         1.77

P/E                 33.7x      13.5x        17.8x      11.7x

CFPS - FD    5.66        4.80         3.32        4.11

Prev.                               5.08         3.90        4.78

P/CFPS          3.2x        3.8x         5.5x         4.4x

Oil (mbbl/d)     24.0       31.0        55.0         75.0

Prev.                                                65.1      90.0


Gas (mmcf/d) 3,333.1 2,981.4  2,900.1  3,000.0

Prev.                              2,994.5  2,932.8  2,900.0


Total (mboe/d) 579.5    527.9       538.4      575.0


Prev.                               530.0        554.0      573.3

 

 

Sector Perform
Average Risk
Price: 18.18
Shares O/S (MM): 736.3
Dividend: 0.80
NAVPS: 21.17
Price Target: 23.00 ¯ 25.00
Implied All-In Return: 31%
Market Cap (MM): 13,386
Yield: 4.4%
P/NAVPS: 0.9x
Avg. Daily Volume (MM): 4.80

 

Event
Encana Corporation’s in-line fourth-quarter results were heavily overshadowed
by its 2013 guidance picture, which pointed toward 3% lower production, about
one-third less net capital, and 15% lower cash flows than we had envisioned.
That Henry Hub prices slid 4.5% yesterday did not help matters for an
independent that is 90% natural gas weighted.
Investment Opinion
• Search for New CEO. Clayton Woitas, Encana’s interim CEO, reaffirmed that
the company’s search for a new CEO is under way and will likely take about
3–6 months to bear fruit.
• Buying Opportunity? Although Encana’s share price could drift further down
amid a chorus of downward earnings and cash flow revisions, this negative
sentiment may afford a buying opportunity in the $17 per share neighbourhood.
• 2013 Guidance – Mixed Bag. Encana’s 2013 production guidance pointed
toward in-line midpoint natural gas production of 2.9 bcf/d and 15% (10,000
bbl/d) lower oil & liquids volumes of 55,000 bbl/d. The market has been razor
focused on Encana’s oil & liquids growth initiatives since its June investor
summit, where it had released a 60,000–70,000 bbl/d range for 2013.
Nonetheless, at least a part of the reduction reflects the removal of 3,000 bbl/d
of ethane production in the United States, which is a low value product.
• Emerging Oil & Liquids Plays. In terms of its emerging oil & liquids plays,
Encana remains excited about its DJ Niobrara play, which should support 8,500
bbl/d of liquids production this year in the context of $230 million of capital
expenditures. Encana will be the centrepiece of a forthcoming RBC Capital
Markets Duvernay Shale event to be held in Toronto on February 28.
• Relative Valuation. At current levels, Encana is trading at a debt-adjusted cash
flow multiple of 6.7x (vs. 6.4x for our North American E&P peer group) in
2013 and 5.7x (vs. 5.2x) in 2014, and at a P/NAV ratio of 0.86x, vs. our
Canadian independent peer group average of 0.96x.
• Recommendation. We maintain our Sector Perform, Average Risk rating
on Encana and have trimmed our one-year price target by 8% to $23 per
share (from $25 per share). Our one-year price target reflects a 60%
weighting toward a multiple of 1.0x our revised Base NAV of $21.17 (vs.
$22.03) per share and a 40% weighting toward an unchanged 2014 implied
mid-cycle debt-adjusted cash flow multiple of 6.4x.
Priced

Rolling with the Punches
? Encana Corporation’s in-line fourth-quarter results were heavily overshadowed by its 2013 guidance picture, which pointed toward
3% lower production, about one-third less net capital, and 15% lower cash flows than we had envisioned. That Henry Hub prices
slid 4.5% yesterday did not help matters for an independent that is 90% natural gas weighted. Clayton Woitas, Encana’s interim
CEO, reaffirmed that the company’s search for a new CEO is under way and will likely take about 3–6 months to bear fruit.
Although Encana’s share price could drift further down amid a chorus of downward earnings and cash flow revisions, this negative
sentiment may afford a buying opportunity in the $17 per share neighbourhood. As a point of reference, Encana’s low of $17.02
was reached on January 17, 2012.
There are two points:
? At current levels, our NAV analysis would suggest that Encana is discounting a long-term Henry Hub price of $4.55 per mcf
with a 2013 debt-adjusted cash flow multiple of 6.7x versus our North American peer group average of 6.4x. Chesapeake and
Southwestern are both trading at 7.4x, or a 0.7x multiple point higher.
? Since the beginning of 2012, Encana has traded at trough and average 2013 cash flow multiples (including hedging
contributions) of 4.4x and 5.3x, respectively. Applying those multiples to our revised 2013 outlook would yield Encana share
prices of $15 and $18 per share, respectively. At those prices, we estimate that Encana would be discounting Henry Hub
prices of $4.25 and $4.55 per mcf, respectively, with 2013 debt-adjusted cash flow multiples of 5.9x and 6.7x.
While its is never easy to bottom tick any stock, our analysis would suggest that Encana is moving into a trading range that appears
increasingly attractive, provided that at least some of its emerging oil & liquids plays cross the line of commerciality in the months
to come.
We maintain our Sector Perform, Average Risk rating on Encana and have trimmed our one-year price target by 8% to
$23 per share (from $25). Our one-year price target reflects a 60% weighting toward a multiple of 1.0x our revised Base NAV of
$21.17 (vs. $22.03) per share and a 40% weighting toward an unchanged 2014 implied mid-cycle debt-adjusted cash flow multiple
of 6.4x.
? 2013 Guidance – Mixed Bag. Encana’s 2013 production guidance pointed toward in-line midpoint natural gas production of 2.9
bcf/d and 15% (10,000 bbl/d) lower oil & liquids volumes of 55,000 bbl/d. The market has been razor focused on Encana’s oil &
liquids growth initiatives since its June investor summit, where it had released a 60,000–70,000 bbl/d range for 2013. Nonetheless,
at least a part of the reduction reflects the removal of 3,000 bbl/d of ethane production in the United States, which is a low-value
product. Our oil & liquids production outlook for Encana is now 55,000 bbl/d in 2013 and 75,000 bbl/d (vs. 90,000 bbl/d) in 2014.
Encana’s Deep Panuke gas field off-shore Nova Scotia is expected to come on-stream by mid-2013, ramping up to design rates of
300 mmcf/d thereafter.
On a much brighter note, Encana’s 2013 (net) capital spending program of $2.35 billon came in one-third ($1.2 billion) lower than
our expectations. Factoring in $750 million of carried capital and a further $500 million to $1.0 billion of planned dispositions,
Encana’s 2013 net budget of $2.35 billion is in line with its cash flow outlook of $2.4 billion. Our revised 2013 cash flow outlook
of $2.4 billion ($3.32 per share) incorporates the midpoint of Encana’s guidance ranges and reflects a $3.75/mmBtu Henry Hub
price outlook. Encana’s balance sheet remains in decent shape with a 2013 average net debt-to-trailing cash flow ratio that has
risen to 2.1x under our revised outlook (vs. 1.5x previously).
Embedded within our 2013 cash flow outlook is a $375 million ($0.51 per share) hedging contribution. As a point of reference,
Encana has hedged 1.5 bcf/d, or 52% of its 2013 natural gas production at a Henry Hub price of $4.39/mcf. Given its hedging
position, Encana’s 2013 cash flows are somewhat insulated from downside risks associated with lower Henry Hub prices. More
specifically, for every $0.50/mcf move in Henry Hub prices, Encana’s 2013 cash flow is impacted by approximately $191 million
($0.26 per share), or 8%.
? Emerging Oil & Liquids Plays. In terms of its emerging oil & liquids plays, Encana remains excited about its DJ Niobrara play,
which should support 8,500 bbl/d of liquids production this year in the context of $230 million of capital expenditures. The
company is also nearing the point of declaring commerciality in its emerging Tuscaloosa Marine Shale (TMS) play, where drilling
costs are budgeted at $15 million this year. Encana will be the centrepiece of a forthcoming RBC Capital Markets Duvernay
Shale event to be held in Toronto on February 28.
Encana caught the market off guard with its signal that it will boost its rig count in the Haynesville from two to five rigs, with about
13 long-lateral wells planned for 2013. Despite being a dry gas play, Encana pegs the half-cycle supply costs associated with its
long-lateral horizontal wells in the sweet spot of the Haynesville (needed to support a 9% after-tax IRR) at about $2.50/mcf, which excludes land. Encana is currently running 43 rigs company-wide.