EnCana Corp. (ECA): 2007 execution has been strong, but valuation still seems rich - Goldman Sachs - 10/26/07
What's changed
EnCana reported 3Q 2007 adjusted EPS of $1.21, above our and the First Call consensus estimate of $1.12. Total production was 4.4 Bcfe/d versus our estimate of 4.3 Bcfe/d. All-in costs of $4.23 per Mcfe were in line with our estimates. Operating cash flow was $2.2 billion versus our $1.8 billion estimate. Realized natural gas prices were stronger than expected, benefiting from narrower differentials than we anticipated. Refining operating income of $319 million exceeded our estimate of $237 million. We are updating our 2007-2012 EPS estimates to reflect revisions to our assumptions for volumes, realized prices, and costs.
Implications
We believe EnCana’s execution in 2007 has been very strong, with the company exceeding its own guidance in most key areas, including production growth and cost control. In addition, the company’s natural gas hedging program has allowed it to grow volumes in regionally soft markets such as the Rockies unhindered by volatile pricing environments. In the Rockies, the Jonah play has notably outperformed expectations. Still, EnCana shares continue to trade at a substantial premium to other large cap E&Ps that we believe is not justified by the company’s relative returns, growth, and free cash flow. We believe EnCana shares can perform well on an absolute basis given our bullish commodity outlook, but we continue to see better value in other E&Ps at this time.
Valuation
EnCana trades at 7.5X 2008E EV/DACF (7.3X excluding the oil sands business), a substantial premium to the large-cap E&P average of 6.0X. We see 9% upside to our $72 DCF-based 12-month target price for EnCana, versus 20% upside for E&Ps.
Key risks
Key risks to our target price include commodity price volatility, government pronouncements, and drilling results. |
