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Summary

  • Encana is preparing to sell its Deep Panuke offshore gas project in Nova Scotia in a deal that could fetch $1B-$2B, although I think such a range is slightly conservative.
  • Although Deep Panuke contributed to more than 30% of ECA’s Q1 operating cash flow of $1.1 Billion, management doesn't think the asset fits the company's long-term strategy.
  • The sale of the company's Deep Panuke assets should help improve the company's near-term trend performance.

When a company considers the sale of an under performing asset or project, potential investors tend to become a bit more interested as to what may be going on with that particular company.

In this article, I not only wanted to examine Encana Corporation's (NYSE:ECA) recent announcement regarding the plans to sell its Deep Panuke gas project, but also highlight several of the reasons behind my decision to remain bullish on this particular oil & gas play.

Deep Panuke: The Odd Man Out

Before we get into why Encana is looking to shed its Deep Panuke gas project it should be noted that during the first quarter Deep Panuke contributed to more than 30% of ECA's operating cash flow of roughly $1.1B and also delivered approximately 253 MMcf/day of gas during the same period, which was roughly 9% of ECA's total production for the quarter.

So why would a company like Encana look to shed such assets? ECA has said the project "doesn't really fit" in its portfolio, since it is the company's only offshore asset and does not produce the oil or higher-value gas liquids ECA is seeking.

With that said, and although I think management's approach is very reasonable one, I think the estimated proceeds are a bit on the conservative side given the fact they fall into a range of $1-to-$2 billion range rather then an estimated range of $1.75 billion-to-$2.25 billion.

By considering Deep Panuke's contributions during the first quarter and the price tag of $1.8 billion that its Bighorn natural gas assets fetched back in June, I strongly believe these assets have the potential to be sold at a much higher range than the $1-to-$2 billion management is currently estimating.

Recent Performance & Trend Behavior

On Friday, shares of ECA, which currently possess a market cap of $16.05 billion, a forward P/E ratio of 12.22, and an annual dividend yield of 1.29% ($0.28), settled at a price of $21.63/share. Based on its closing price of $21.63/share, shares of ECA are trading 6.25% below their 20-day simple moving average, 6.74% below their 50-day simple moving average, and 7.41% above their 200-day simple moving average.

It should be noted that these numbers indicate a short term downtrend as well as a long-term uptrend for the stock, which generally translates into a moderate selling mode for most near-term traders and a slight buying mode most long-term investors.

It should be noted that the sale of the company's Deep Panuke assets should help drive near-term trend performance higher and it shouldn't be too long before shares are once again trading above $24/share.

Upcoming Earnings Outlook

When it comes to the company's upcoming Q2 earnings, there are a number of things potential investors should consider. For example, analysts are currently calling for ECA to earn $0.27/share in terms of EPS (which is $0.43/share lower than what the company had reported during Q1 2014, and $0.07/share better than what the company had reported during the year-ago period) and $1.61 billion in terms of revenue when its latest earnings are released in August.

In order to meet and/or exceed its quarterly EPS estimates, there are a number of areas in which I'd like to see a solid improvement versus its Q1 2014 results.

For instance, I'd like to see a 4%-to-7% increase in the company's Q2 company's cash flows (as compared to Q1's cash flows of $1.1 billion), a 6%-to-10% increase in the company's natural gas production (as compared to Q1's natural gas production of 2.809 Bcf/day), a 2%-to-5% increase in the company's natural gas liquids production (as compared to Q1's natural gas liquids production of 67.9 Mbbls/day) and lastly, a 4%-to-6% increase in the company's net earnings (as compared to Q1's net earnings of $116 million).

Conclusion

For those of you who may be considering a position in Encana, I strongly recommend keeping a close eye on the company's upcoming earnings, its long-term trend behavior and any additional asset sales that may strengthen the company's long-term growth. By shedding its natural gas assets and renewing its focus on the production of both oil and natural gas liquids, there's a very good chance investors could see the company's share price surpass its 52-week high over the next 3-6 months.

Source: Encana: Staying Bullish As The Company Plans To Sell Its Deep Panuke Assets