Morningstar | Lowering Encana’s Fair Value Estimate; Stock Looks Fairly Valued. See Updated Analyst Note from 20 Dec 2018
We are lowering our fair value estimate on no-moat Encana to $6.50 (CAD 8) from our previous estimate of $8.50 (CAD 11) to reflect our lower near-term price commodity forecasts. The stock is currently trading in 3-star territory and looks fairly valued. 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.We also think that the company overpaid for the Newfield Exploration assets and is diluting shareholder value with the acquisition. We believe that Encana is overly optimistic about the value that the acquired assets will bring to the company and is recklessly pursuing growth.
Furthermore, we are maintaining our no-moat rating.
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.
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