Encana Shares Upgraded To Overweight By Barclays

What Sets Encana Apart

The brokerage said Encana is the second largest core Midland Basin producer after Pioneer. Over the past three years, Encana has successfully transitioned to higher margin (i.e. liquid) "core four" assets in the Permian, Eagle Ford, Montney and Duvernay.

"Use of Encana's 2018 capital spending and production indications lead us to infer a very strong return in 2018 on new spending of circa 30 percent on the corporate level (the 2017 inference is muddled by 2016 M&A)," analyst Thomas Driscoll wrote in a note.

This inferred return is 18 percent better than the Barclays' average return for peers. The analyst expects top-tier delivery from the "core four" basins and raised 2017 and 2018 liquids estimates by 6 percent and 20 percent, respectively.

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Encana's preliminary 2017 budget of $1.4 billion–$1.8 billion is 7 percent above Barclays' previous estimate. Encana expects to grow liquids volumes by 15–20 percent per year.

Looking Forward

Driscoll forecast total volume growth to outpace expansion in market capital deployed by 12 percent through 2018, compared to 5 percent from peers. Assuming flat $55 crude and $3 gas, Encana expects to grow total production by 60 percent by 2021, as it doubles core four asset volumes and grows liquids by 15–20 percent CAGR.

Further, Encana continues to reduce drilling and completion (D&C) costs in its core four assets and continues to reduce lease operating costs.

Encana, which has ample liquidity and financial flexibility, expects to grow cash flow by 300 percent over the next five years, assuming flat $55 crude and $3 gas prices.

"We are currently modeling through 2018 and are expecting 145 percent cash flow growth if we were to use the same commodity price assumptions," Driscoll added.

Over 2017– 2018, Encana believes it can double corporate margins and be able to self-fund growth starting in 2018.

Shares of Encana closed Monday's trading at $11.09. The analyst's $14 target implies potential return of 26 percent.

Full ratings data available on Benzinga Pro.