Morningstar | Lowering Encana's FVE; Stock Is Now Trading in 3-Star Territory. See Updated Analyst Note from 02 May 2019
After taking a fresh look at Encana’s first-quarter results, we are lowering our fair value estimate to $7.50 (CAD 10) from $9 (CAD 12). On the heels of a down quarter, we increased our outlook for the company's operating costs and capital expenditures. The stock is now trading in 3-star territory. 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. After the sell-off, the stock looks fairly valued, and we suggest that investors remain on the sidelines. Furthermore, we are maintaining our no-moat rating.As a reminder, Encana's first-quarter results missed our expectations. The company generated cash flow from operations of $529 million and free cash flow of negative $314 million, both of which were below our expectations. Lower-than-expected cash flow was a result of higher-than-expected capital expenditures and operating costs. Encana reported first-quarter production of 468.2 thousand barrels of oil equivalent per day, or 566.6 mboe/d on a pro forma basis. Either way, production was below our expectations, driven by a slower ramp-up of the company’s planned drilling production. On a positive note, the company announced another $25 million in annual expected synergies from the Newfield acquisition, bringing the total expected annual synergies to $150 million.
With the stock price depressed, Encana repurchased 56 million shares during the first quarter and another 35 million during April. To date the company has spent $654 million on the buybacks.
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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