What to Expect When Encana Reports Earnings Next Week

Can Encana get back to winning?

The Motley Fool

Encana (TSX: ECA)(NYSE: ECA) will release its quarterly report on Wednesday. Like rival producers Talisman Energy and Chesapeake Energy, Encana has emphasized production of oil and liquids over natural gas in recent years. In the company’s upcoming report, shareholders will be eager to see how well management is executing on its turnaround strategy.

Stats on Encana

Analyst EPS Estimate

$0.50

Year-Ago EPS

$0.24

Revenue Estimate

$1.73 billion

Change From Year-Ago Revenue

63.20%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance

Can Encana get back to winning?

Encana’s new chief executive has promised drastic action to revive what was once Canada’s hottest energy producer. Last year, Doug Suttles outlined his plan to get the company back to “winning”, which includes investing in fewer plays, transitioning towards a more profitable production mix, and spinning off low-returning properties. The changes signal a new era of discipline for a company whose past was all about expansion and growing production.

Investors seem to be warming up to Suttles’ turnaround strategy. Analysts have ratcheted up their views on Encana’s earnings in recent months, adding $0.32 per share to their consensus fourth-quarter estimates and increasing their full-year 2014 outlook by more than 30%. The stock has rocketed higher in lockstep, up 35% since the start of the year.

Encana’s fourth quarter results confirmed the turnaround is taking shape. Output of higher margin products like oil and natural gas liquids, collectively called liquids by management, increased 82% from a year earlier, averaging 66,000 barrels a day in the fourth quarter. Excluding one-time items, the company’s $0.31 per share profit handily exceeded the street’s estimates.

To keep that momentum going, Encana needs to continue ramping up its liquids production. Today, liquids account for roughly 10% of Encana’s production while natural gas production accounts for the remaining 90%.

However, the company hopes that those numbers will look much different in the coming years. By 2017, Encana is targeting a more balanced production mix, and expects one-third of its production will come from natural gas, one-third from other natural gas liquids, and the remaining third from oil and condensate.

The second part of Suttles’ plan is to trim the company’s unwieldy asset portfolio. Over the past few months, Encana has sold its stake in an Alberta liquefied natural gas plant and certain natural gas properties in the Jonah field in Wyoming. And just last week the firm agreed to sell about 90,000 net acres in east Texas for about U.S. $530 million to an undisclosed buyer.

Its biggest asset sale may be yet to come. Again last week Encana released a preliminary prospectus of a new company called PrairieSky. The spin-off will consist of Encana’s so-called mineral fee title land covering 5.2 million acres across Alberta. The new company is designed to collect cash from other energy drillers operating on the land, then distribute a large amount of that to its own shareholders.

Encana hopes to garner between $747 million and $861 million for PrairieSky after the initial public offering later this month. Given investors’ insatiable demand for income, the offering is expected to be a hit and could be a hidden catalyst for Encana shares.

Watch this space

Encana’s turnaround hinges on transitioning from low-priced dry gas to higher margin liquids and oil. In 2014, the street is looking for the company to produce between 70,000 and 75,000 barrels a day of oil, condensate and natural gas liquids such as propane and butane. In Encana’s upcoming report, watch to see how well the company is ramping up production of these products.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no positions in any of the stocks mentioned in this article.

More on Investing

A worker gives a business presentation.
Stocks for Beginners

2 Reasons to Buy Onex Stock Like There’s No Tomorrow

Onex (TSX:ONEX) stock has been a strong performer over the years, both in terms of growth and dividends that investors…

Read more »

Canadian Dollars
Stocks for Beginners

The Best Stocks to Invest $5,000 in Right Now

Are you looking to put some cash into the stock market? Here are three picks to put on your watch…

Read more »

calculate and analyze stock
Dividend Stocks

Got $1,000? 3 Dividend Stocks to Buy and Hold Forever

Dividend stocks like Restaurant Brands International (TSX:QSR) can pay substantial amounts of passive income.

Read more »

financial freedom sign
Bank Stocks

This Ridiculously Cheap Warren Buffett Stock Could Help Make You Richer

American Express stock is part of Warren Buffett's equity portfolio, and the stock trades at a steep discount in 2024.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Monday, February 26

After rising for two weeks in a row, the main TSX index is now at its highest level in more…

Read more »

stock analysis
Investing

Buy the Dip: 2 Stocks to Buy Today and Hold for the Next 5 Years

These Canadian stocks are trading at discounted valuations, providing an opportunity for buying the dip.

Read more »

bulb idea thinking
Investing

Safety in Size? 2 of the Bluest Blue-Chip Stocks I’d Buy Now

TC Energy (TSX:TRP) and another cash cow have huge dividend yields for safe investors.

Read more »

A cannabis plant grows.
Cannabis Stocks

Can Aurora Cannabis Stock Recover in 2024?

Aurora Cannabis stock is down 99% from all-time highs but remains a high-risk bet, despite its cheap valuation.

Read more »