Encana’s Q1 Earnings and Cash Flow Slammed


Encana reported first-quarter results on Thursday that were in line with general expectations of low production growth and a large drop in realized prices as 2012 hedges expired. Despite higher natural gas prices so far in 2013, many of Encana’s plays are still realizing prices below their full-cycle break-even costs (at the company level), and the company will continue to limit capital spending to its best liquids-growth opportunities.

Production levels were flat from the quarter prior, at just over 3.1 billion cubic feet of gas equivalent per day. Revenues were substantially down, however, falling 34% sequentially as the firm took a double hit from hedges. Not only did 2012’s hedges expire, causing the firm’s average realized gas price to plummet from $5.02/mcf last quarter to $3.86/mcf for the current period, but the current hedges in place drove non-cash losses at the top line, as spot prices improved over the quarter. Net income and cash flow responded in kind, both declining by about $350 million.

The company provided a brief update on the search for a new CEO. The search committee has identified both internal and external candidates and expects to have the position filled by mid-year. There have been a high number of CEO replacements over the past 12 months in the Canadian E&P space, all of them (to our best knowledge) filled by individuals somehow already connected to the respective firms, either through board membership or as an existing member of the management team.

Accordingly, we’d bet on an internal candidate for Encana’s new CEO, and rule out an external candidate willing to make sweeping changes to reform the firm. The real driver of significant change for Encana will be the success of the firm’s liquids program. Management still seems somewhat evasive on this topic. Today’s press release contained some high-level production figures which shone a favorable light on the firm’s activities over the quarter, but gave no firm indication of the prospects of many of the plays, nor a mention of the firm’s progress in finding a joint venture partner in the package of exploration plays currently being offered.

Developing these exploration plays will be more difficult than management is leading investors to believe. While Encana will hit its goals for doubling liquids production this year (thanks to increased NGL processing capacity), analysts are less sanguine regarding oil production growth in 2014 and after.


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