Raising target price to $51, but maintain Sell rating on valuation July 26, 2007
Goldman Sachs
What's changed
EnCana's 2Q 2007 adjusted EPS was $1.42 versus our estimate of $1.13 and the First Call consensus of $1.21. Production of 4.31 Bcfe/d was above our estimate of 4.18 Bcfe/d, and the company’s realized gas price of $7.62 per Mcf was above our estimate of $7.00 per Mcf. All-in unit costs of $4.14 per Mcfe were slightly higher than our forecast of $4.01 per Mcfe. We are raising our 12-month DCF and cash flow-based target price for EnCana shares to $51 from $48, reflecting higher assumed realized refining margins for the company's integrated oil sands joint venture (representing an incremental $2 per share), in addition to higher production estimates for the company's E&P assets ($1 per share).
Implications
We believe EnCana delivered a strong quarter on multiple fronts, and the company's top quartile share price performance versus other E&Ps today was justified. In particular, results from the company's key resource plays in the United States (e.g., Jonah, Piceance, Deep Bossier, and the Barnett Shale) each exceeded our estimates. Canadian gas production was more in line with our estimates. While we had previously been concerned that EnCana's production guidance was slightly aggressive in the context of management's capital expenditures assumptions, the company now appears well on track to achieving its growth targets. For now, we maintain our Sell rating on EnCana as we continue to believe the shares are overvalued relative to other gas E&Ps, even adjusting for what we consider to be a favorable $16 per share oil sands valuation assumption.
Valuation
We estimate EnCana's E&P business trades at 6.4X 2008E EV/DACF, versus the 5.4X average of other large-cap gas E&Ps. We see 17% downside to our revised $51 12-month target price, versus 7% downside for peers.
Key risks
Volatility in commodity prices and refining margins, and drilling results. |
