EnCana Corp Up 1.5% as Credit Suisse Gives It The Once Over

Credit Suisse has revised its estimates, raised its target price and kept an Outperform rating on EnCana Corp. (ECA.TO).

Maintaining our Outperform Rating: "The current supply/demand dynamics for N.A. gas markets makes buying Encana challenging. However, we believe the combination of the company's low-cost structure and vast, independently evaluated resource base positions Encana to provide its shareholders with a unique and compelling investment opportunity. Should the PetroChina transaction close as expected, and if Encana clearly communicates its ability to grow its 'proven only' asset value with share buybacks and not just accelerated production, we believe our new 12-month target price of US$38.00 may be realized in a shorter timeframe."

What to do with the JV Proceeds? "We believe the key question is what Encana will do with the C$5.4 billion cash from PetroChina. With 255 mmcfe/d sold in conjunction with the transaction, we anticipate a similar 7.5% share buyback after closing (US$1.8-$2.0 billion), followed by potentially US$0.5-US$1 billion in debt repayment. Our analysis suggests that Encana could have ~US$2.0 billion of cash and/or receivable following a share repurchase and debt reduction as described above. How the remaining proceeds will be used is the unknown opportunity for investors."

Revising Estimates: "Given our revised outlook for production resulting from the scaling back of growth plans, combined with new IFRS reporting standards and announced Q111 results, we have lowered our operating EPS forecasts from US$0.72 to US$0.59 for 2011, from US$1.61 to US$1.33 for 2012 and from US$2.50 to US$2.18 for 2013."

Valuation: "Our revised US$38.00 target price (was US$37.00) is based on 6.25x 2012E EBIDAX of US$5,742 million, which is in line with the 6.4x implied for the company's large cap peers. Our target price is also set at a modest discount to our 'proven only' NAV of US$39.00/share, yet represents a 20% discount to our estimated P1 + C1 NAV of US$48.70/share."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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