Expect Weakness In Encana Shares Following Surprise Stock Offering Announcement

Shares of Encana Corp (USA) (NYSE: ECA) fell as much as 6.9 percent to $9.18 following its surprise stock offering, which should raise about $1.0 billion and adds 12.5 percent to its share count.

Encana would spend about half of the proceeds to repay bank borrowings and bridge a likely funding gap in 2017 on weak commodity curves.

"The deal was a surprise to us despite the recent finalization of its ‘Shelf Prospectus' in late-August. But ECA was amongst the very few E&Ps not to have sold equity this year, instead relying on asset sales," Jefferies analyst Jonathan Wolff wrote in a note.

Related Link: Scotia Group Downgrades Encana To Underperform

Meanwhile, investors may pressure the company to monetize its (Canadian) Montney land holdings or consider a strategic re-alignment as the Canadian assets are generating very weak cash flows in the current price environment. At the same time, Encana's "crown jewel" Midland asset needs significant reinvestment.

"We think its good logic to expand the Midland program and test more acreage. Tonight's offering should enable a doubling of Permian wells turned on to sales in 2017 as compared to 2016. The latest guidance was for 65 horizontal wells in 2016, so we can expect there to be ~130 horizontal completions in 2017," Wolff noted.

In addition, the analyst sees a funded, multi-year growth outlook as a likely outcome at the company's upcoming analyst day on October 5.

Wolff has a Buy rating and $13 price target on Encana shares, which is currently down 5.58 percent to $9.31.

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