Morningstar | Encana Looks Oversold
Encana is engaged in the development, exploration, production, and marketing of hydrocarbons in Canada and the U.S. The company’s core assets include prime real estate in the Permian, Eagle Ford, Montney, and Duvernay resource plays. These are among the most cost-advantaged shales in North America, with substantial opportunities for profitable drilling at current commodity prices. The company has around 20,000 total drilling locations in its inventory, which could take decades to work through. Half of these locations are designated as "premium" and are expected to yield wells that meet or exceed current type curves. Therefore, management doesn't have to worry about running out of high-graded inventory anytime soon. Encana transformed its portfolio in 2014-15 with numerous asset sales and two major, high-quality liquids-rich additions in its core acreage plays. Traditionally, high-cost natural gas accounted for over 90% of the company’s production. As a result of the transformation, we expect that number to fall to about 50% in 2018 as the company takes advantage of the high-quality drilling locations in the core acreage. This will meaningfully enhance the firm's profitability and margins over the next five years, reflecting the longer-term success of management's 2014-15 portfolio reshuffle. Even though Encana’s liquids production is profitable at prices below $40/bbl West Texas Intermediate, a substantial component of the firm's current output comes from lower-margin legacy assets. Full-cycle break-evens on the company’s natural gas production exceeds $4/mcf Henry Hub, compared with our midcycle forecast of $3/mcf Henry Hub.The acquisition of Newfield Exploration will extend Encana's production footprint into the STACK/SCOOP basin and provide cost synergies with the company's other operations. However, we think that Encana overpaid for the assets and diluted shareholder value, which resulted in a large sell-off. We now think the stock looks oversold, and we see upside at current levels.Encana is in the business of the exploration for, the development of, and the production and marketing of natural gas, oil and natural gas liquids (NGLs). All of Co.'s reserves and production are located in North America. As at Dec. 31, 2016, total proved developed and undeveloped reserves for natural gas, oil, and NGLs were 2.90 billion cubic ft., 155.6 million barrels (MMbbls), and 150.4 MMbbls, respectively. Co.'s operating and reportable segments are: Canadian Operations, USA Operations, and Market Optimization.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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