Encana Rises on Higher 2015 Capex and Positive Outlook - Analyst Blog

Moving against the overall industry trend, Encana Corporation (ECA) announced an increase in its 2015 capital budget. The exploration and production company also provided a positive production outlook for the upcoming year. Following the announcement, shares of Encana gained over 7% on the NYSE.

Capital Budget 2015

The company proposed a capital plan in the range of $2.7-$2.9 billion, higher than its 2014 guidance of $2.5-$2.6 billion. About 80% of the capex would be directed toward the four oil-rich, high-margin plays – Montney, Duvernay, Eagle Ford and Permian.

The above mentioned plays have low supply costs and can generate promising returns even in this low price environment. Moreover, these are expected to contribute approximately 60% of the total production and 70% of the company's upstream cash flow in 2015.

Production Guidance

Management at Encana stated that it plans to continue its new strategy of increasing liquid production to facilitate growth.

The company anticipates 70% yearly growth in its 2015 liquid output, with production ranging between 140,000 and 160,000 barrels per day (bbls/d). Natural gas production is expected to range between 1,600 and 1,700 million cubic feet per day (MMCf/d).

Overall 2015 production is likely to range between 405,000 and 440,000 barrels of oil equivalent per day (boe/d).

Cash Flows

The company expects about 75% of its 2015 cash flow to come from liquid-linked production. The company projects cash flow in the range of $2.5–$2.7 billion, lower than the current year projection of $3.2–$3.3 billion. Higher margin production and improved cost structure are likely to be negated by reduced commodity prices.  

Further, the company expects to receive $800 million in the first quarter of next year as proceeds from its previously announced Clearwater assets divestiture.   

2015 Operational Update

Montney: Encana plans to invest a total of $600–$700 million (including investments through its Cutbank Ridge Partnership) in the play. The company anticipates liquid production in the range of 19,000–20,500 bbls/d, up 5% year-over-year (y-o-y). Natural gas production is expected to be between 580 and 620 MMcf/d.

Duvernay: Encana plans to invest a total of $1–$1.2 billion (including investments through its Brion Duvernay Gas joint venture) in the play. Liquid production is expected to range between 6,000 and 7,000 bbls/d, up 200% y-o-y.

Eagle Ford: Encana plans to invest a total of $650–$750 million in the play. Liquid production is expected to range between 44,000 and 49,000 bbls/d.

Permian: Encana plans to invest a total of $850–$950 million in the play. Volumes are expected to increase by about 50,000 boe/d.

DJ Basin, San Juan and Tuscaloosa Marine Shale (TMS): Encana plans to invest a total of $350–$450 million in these plays. Total liquids production is anticipated to be between 25,000 and 28,000 bbls/d.

Senior Notes Redemption

Encana announced that it will redeem the 2021 and 2022 due senior notes of its subsidiaries Athlon Holdings LP and Athlon Finance Corp., and expects fourth quarter cash flow to be impacted by it. The company had assumed these debts during the acquisition of Athlon Energy earlier this year. Encana expects a one-time payment of $125 million.

Zacks Rank & Other Stock Picks

Currently, Encana carries a Zacks Rank #3 (Hold).

Meanwhile, one could consider better-ranked players like Seadrill Partners LLC (SDLP), Spectra Energy Partners, LP (SEP) and SandRidge Mississippian Trust I (SDT). All these stocks sport a Zacks Rank #1 (Strong Buy).