EnCana Corp. (ECA): Production growth on track, though relative valuation expensive - Goldman Sachs - February 15, 2008
What's changed
EnCana reported mixed 4Q2007 operating and financial results. Adjusted EPS was $1.10 versus our estimate of $1.32 and consensus $1.31. Production of 4.5 Bcfe/d was slightly above our estimate of 4.4 Bcfe/d, though unit operating costs were $4.69/Mcfe, above our estimate of $4.38/Mcfe. Operating cash flow was $1.88 billion versus our estimate of $2.05 billion. 2007 drill bit reserve replacement of 227% was in line with our estimate. Natural gas drillbit finding and development costs of $2.40/Mcfe were down from $2.70/Mcfe in 2006, though above $1.76/Mcfe from XTO Energy and $1.91/Mcfe for EOG Resources. We have updated our 2008-2012 estimates.
Implications
EnCana continues to deliver strong production growth at or above guidance, though the uptick in costs in 4Q2007 was greater than expected and seemingly sustainable given the stronger Canadian dollar. We continue to view EnCana shares, adjusted for oil sands, as overvalued relative to other natural gas levered E&Ps. Excluding oil sands, EnCana trades at 6.8X 2008E EV/DACF versus 6.1X on average for large-cap gas levered E&Ps (including APC, CHK, EOG, XTO, and DVN adjusted for oil sands). We believe EnCana’s returns, free cash flow, and growth warrant closer to a peer average multiple and as such we continue to rate the shares Sell. Note that we are bullish on natural gas, have an Attractive coverage view for E&Ps, and believe that EnCana shares can perform well on an absolute, if not a relative, basis.
Valuation
We see 11% upside potential for EnCana shares to our $78 DCF-based 12-month target price versus 19% for large-cap E&Ps.
Key risks
Commodity volatility, cost pressures, and government pronouncements. |
