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A Review of Encana’s Third Quarter Results: Coming out of the Doghouse?

Encana’s (TSX: ECA, NYSE:ECA) third quarter results were better than expected.  EPS was $0.25 compared to a loss of $1.69 a year earlier.  This is the fifth quarter in a row that the company has beat expectations, and it was driven by a continued focus on natural gas liquids (NGLs), capital efficiencies, and cost reductions that have come faster than initially expected.  Let’s take a closer look at the results and some of the main takeaways from the quarter.

Focus on Oil and Natural Gas Liquids

Oil and NGL production increased 92% compared to the same period last year, as the company continues to increase its focus on this more profitable market.  Going forward, Encana is particularly encouraged with results that are coming out of the liquids rich Duvernay shale play.  This year, the company has added roughly 21,000 acres of Crown land to its position in that area.

Cost Savings Progressing Better than Expected

Encana’s initial plan for cost savings was for $100 to $150 million by the end of this year.  At mid-year this estimate was bumped to $200 million.  As of the end of the third quarter, they were ahead of the initial schedule, having already hit $110 million in cost savings, but there is still work to be done here.

Capital Discipline

Capital expenditures will be lower this year than originally planned as Encana continues to focus on capital discipline and the best opportunities and efficiencies.  Capital spending plans for the year were cut to $2.7 – $2.9 billion from an original estimate of $3 – $3.2 billion, and lower than 2012 capital spending of $3.5 billion.

Encana forecasts that cash flow for 2013 will be $2.4 – $2.5 billion.  This is lower than 2012 cash flow of $3.5 billion but with higher returns on capital planned and lower capital spending.

Cash and Equivalents

Encana’s cash on the balance sheet is still strong, as it finished the quarter with $3.3 billion in cash and equivalents.

Strategic Review Still Ongoing

Management was still tight lipped with regard to the changes that are coming, but we can make some educated deductions as to what this plan will entail.   We can probably expect a dividend cut, more asset sales and/or leases, and more spending cuts.  The new strategic plan will be announced before the end of the year.

Bottom Line

After the fifth quarter of better than expected performance, the market is still somewhat skeptical.  I, however, like what I’m hearing and seeing from the company.  New management has at least won over my confidence and made be believe that they’ll be successful in coming up with a strategy to finally enable Encana to get back to making healthy returns from the resource that they have in the ground.

More expert advice

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Fool contributor Karen Thomas owns shares of Encana.  The Motley Fool has no positions in the stocks mentioned above at this time.

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