Strong quarter on production, pricing, and downstream - Goldman Sachs - July 25, 2007
News
EnCana reported 2Q2007 adjusted EPS of $1.50 versus our $1.13 estimate and First Call consensus of $1.21. Production was 4.31 Bcfe/d, above guidance and our 4.18 Bcf/d estimate. Adjusted operating cash flow was $2.3 billion versus our $1.8 billion estimate and consensus of $1.9 billion. Integrated oil sands EBITDA was about $100 million greater than expected.
Analysis
EnCana beat expectations on all key fronts: production, prices, and downstream income. The company's strong production is a function of further improvements to US production plays, particularly the Deep Bossier and the Jonah field. Going forward, we believe EnCana's relative performance will be a function of whether the company can continue the positive momentum seen this quarter and whether the company has achieved enough goodwill from the Street that would allow for a meaningful rampup in spending and growth during 2008, as management indicated it is planning, without a negative reaction to EnCana shares.
Implications
Our 12-month target price is under review, especially considering greater downstream income. A view of sustainably greater downstream income likely puts EnCana's ex-oil sands EV/debt-adjusted cash flow multiple at a discount to XTO Energy, although we believe a wider discount still seems deserved for now despite the strong results due to EnCana's lower returns We believe strong 2Q2007 production from EnCana (Sell-rated) and XTO Energy (Buy-rated) is supportive of the view that industrywide North American onshore production is surprising to the upside and is one of the reasons for greater-than-expected builds in gas storage. |
