1Q2007 on track; shares still seem expensive - Goldman Sachs - April 26, 2007
What's changed
EnCana reported 1Q 2007 results which were stronger than consensus. Adjusted EPS was $1.09 vs. our $0.93 and consensus of $1.01. Production was 4.18 Bcfe/d versus our 4.22 Bcfe/d estimate. Operating cash flow was $1.75 billion versus our $1.59 billion estimate. Management slightly revised down oil guidance and maintained natural gas guidance.
Implications
We believe the quarter was very neutral and that the company had no major hiccups. US production as expected is on track, as issues in the Jonah field seem solved and exploration in the Deep Bossier showed success. 2Q and 3Q will be key for the Canadian drilling program to generate expected growth and meet production guidance. We still remain skeptical regarding EnCana’s ability to grow natural gas production 3%.
Valuation
The main reason for our Sell rating is valuation. Even when affording EnCana’s oil sands JV stake $14 per share, the remaining mostly natural gas business trades at 5.9x 2008 EV/debt-adjusted cash flow. This compares to 6.4x for XTO Energy (Buy), 5.6x for EOG Resources (Neutral) and 5.0x for Chesapeake Energy (Neutral). We believe EnCana should trade closer to the bottom of the group. EnCana has an inferior free cash yield, growth and returns vs. XTO, inferior growth and returns vs. EOG and inferior growth and cash returns (though better ROCE) vs. Chesapeake. We rate EnCana Conviction Sell as we prefer oil-levered stocks and refiners to gas-focused E&Ps. We rate Suncor Energy and Occidental Petroleum Conviction Buy. We see 13% downside to a $47 12-month discounted cash flow based target price versus 3% downside for E&Ps.
Key risks
Commodity price volatility, drilling results, cost pressures, securing well permits and weather are key risks. |
