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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Dennis Roth who wrote (39495)	2/25/2005 8:05:16 AM
From: Dennis Roth	Respond to of 206291

EnCana (OP/A): Highest exposure to unconventional gas in North America among large-cap E&Ps Goldman-Sachs February 23, 2005 We continue to believe that EnCana Corp. has superior organic growth potential versus other large-cap E&Ps, and we believe that EnCana shares can continue to perform well if the company meets its production, spending and leverage targets. Among large-cap E&P companies, EnCana is one of the best positioned in unconventional gas and oil sands, which can generate both growth and free cash flow as well as benefit from what we believe to be the rising potential for super-cap integrated oil companies to pursue consolidation opportunities in North America. We continue to rate EnCana Outperform relative to an Attractive coverage view. BETTER GROWTH POTENTIAL + SIMILAR RETURNS SHOULD = VALUATION PREMIUM We believe that EnCana's positioning in key unconventional gas areas such as Jonah, the Piceance Basin, Horseshoe Canyon coal-bed methane, the Barnett Shale and East Texas gives the company greater growth potential versus other large- cap E&P companies. While EnCana is expected to grow production in absolute terms at about 5-6% in absolute terms, adjusting for acquisitions and divestitures we see growth in 4Q05 versus 4Q04 of about 9%. We believe that EnCana can grow production at high single-digit levels sustainably if it preferred and is in a unique position to control its own destiny. While EnCana's cash-on-cash returns are at levels similar to those of other E&Ps, we still believe that EnCana's asset quality advantage warrants a modest valuation premium. We do not believe there are any expectations for a noticeable outperformance in free cash flow or returns for EnCana shares-- thus if it can successfully boost free cash flow and returns, we think EnCana can trade towards the premium valuation of XTO Energy. KEY UPCOMING CATALYSTS (1) Ability to meet growth, spending and leverage targets. We believe that there remains skepticism that EnCana can successfully execute simultaneously on its growth, capital spending and leverage targets. We ourselves are using the lower end of the company's 4.25-4.50 Bcfe/d range of 2005 production guidance for North America. Meeting the mid-point/upper end of guidance is contingent on the ability by mid-year to accelerate drilling at Jonah through the completion of the Environmental Impact Statement (EIS) and the ability to begin flowing additional Canada gas wells early in the third quarter. Service cost inflation and the strength of the Canadian dollar are the key drivers of variability in meeting the company's $4.9-$5.2 billion capital expenditures forecast. On the balance sheet, EnCana is targeting net debt/capitalization of 30%-40%. When adjusting for goodwill, net debt/tangible capital is currently at 38%. (2) Release of updated probable/possible reserves. EnCana plans to release in the coming months an update to its probable and possible reserves, which we believe could be a positive catalyst for the stock. At present, EnCana has identified 16 Tcf of probable/possible natural gas reserves, relative to 10.5 Tcfe of existing proved gas reserves. We do not think EnCana's stock is receiving full credit for the extent of the company's resource potential. However, to receive full credit, EnCana must show evidence it can deliver on its belief that these reserves can be added at about $1.50 per Mcfe. An update to probable/possible reserves could also increase the value afforded to the company's oil sands/heavy oil resource, which we believe could be significant. (3) Divestitures. EnCana continues to pursue the divestiture of assets in the Gulf of Mexico, Ecuador and non-core assets in Canada. With valuations rising, this could benefit the company in ultimate proceeds, though less so for Ecuador given both the political risk as well as the heavy quality of the company's crude reserves. For now, we are assuming $1 billion in proceeds from a sale of Gulf of Mexico assets. 4Q 2004 RESULTS SLIGHTLY BELOW EXPECTATIONS EnCana reported 4Q 2004 operating and financial results from both discontinued and continuing operations slightly below expectations. Adjusted EPS of $1.23 (reported EPS was $5.52 which included a gain from the sale of the company's North Sea assets as well as other non-cash gains) was below our estimate of $1.39 on higher costs combined with slightly weaker than expected production and realized commodity prices. Operating cash flow of $1.49 billion was above our estimate of $1.38 billion due to higher deferred taxes. DD&A per barrel of oil equivalent (BOE) was $9.83 versus our $9.13 estimate, while production was 764 MBOE/d versus our estimate of 774 MBOE/d. The company realized commodity prices of $29.38 per barrel of oil and $6.03 per Mcf of natural gas, below our estimates of $32.81 and $6.18, respectively. Net debt was $7.3 billion at year end, with net debt/tangible capital at 38%. UPDATING ESTIMATES We are introducing quarterly EPS estimates for 2005 and updating our full-year 2005 and full-year 2006 EPS estimates to incorporate minor changes to our production, realized price and unit cost assumptions. Our 1Q 2005, 2Q 2005, 3Q 2005, and 4Q 2005 EPS estimates are $1.05, $1.10, $1.24, and $1.41, respectively. Our new full-year 2005 EPS estimate is $4.80 ($4.74 previously), and our new full-year 2006 EPS estimate is $6.00 ($6.12 previously). There is no change to our 2007-2010 (normalized) EPS estimates. Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti.