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Canada’s largest natural gas producer EnCana Corp. (ECA) is scheduled to report its fourth quarter 2010 results on February 10.

The Zacks Consensus Estimate for the to-be-reported quarter is a profit of 13 cents per share (with a downside potential of 7.7%) on revenue of $1.7 billion. In the year-ago quarter, EnCana recorded a gain of 50 cents per share, while sales came in at $2.7 billion.

Third Quarter Recap

EnCana’s third-quarter 2010 results came in weaker than expected, primarily reflecting low natural gas prices, partially offset by higher volumes. Operating earnings per share, excluding one-time items, came in at 13 cents, missing the Zacks Consensus Estimate of 22 cents and way below the year-ago income of 50 cents.

However, revenues (net of royalties) came in at $2.4 billion, up 6.8% year-over-year and also beat the Zacks Consensus Estimate of $1.7 billion amid improved output.

Points to Ponder for Fourth Quarter

EnCana possesses a high-quality, low-cost asset base in some of the best gas plays in Canada and the U.S. Mature plays with stable production, such as Jonah and Greater Sierra, nicely complement the company’s high potential growth areas such as Haynesville, Montney and Horn River. A strong financial health and an active hedging policy are some other strengths of EnCana.

The key negative, in our view, is the current unfavorable macro backdrop (weak natural gas prices), which is expected to continue drowning out the positives, at least in the near term. Another area of concern for us is the transfer of the high-quality and high-growth enhanced oil recovery and downstream assets (post-split). As a result, the business risk profile of the reorganized EnCana is weaker than that of the predecessor company.

Agreement of Analysts

As a result of the above-mentioned factors, there has been a slight downward bias among the analysts regarding EnCana’s outlook. In particular, we see a notable number of estimate revisions over the past 30 days.

Out of the 14 analysts covering the stock, 3 have revised their estimates upwards for the fourth quarter of 2010, while 4 have gone in the opposite direction.

Magnitude of Estimate Revisions

However, despite a handful of negative analyst revisions for the fourth quarter of 2010, the Zacks Consensus Estimates have risen by 2 cents (from 11 cents to 13 cents) in the last 30 days.

Our Recommendation

EnCana – which hived off its oil sands business into a separate company called Cenovus Energy Inc. (CVE) in 2009 – has one of the largest natural gas resource portfolios in North America, which provides a diverse/high quality inventory of reserves.

Other positive attributes in the EnCana story include its active hedging policy, competitive cost structure, strong balance sheet and robust free cash flows. However, the company’s exposure to weak natural gas prices offsets these strengths and remains a key area of concern, in our view. The transfer of the high-quality and high-growth enhanced oil recovery and downstream assets (post-split) have also held back the stock.

As such, we expect growth potential of the company to be restrained.

EnCana shares currently retain a Zacks #3 Rank, which translates into a short-term 'Hold' rating. We are also maintaining our long-term '"Neutral'" recommendation on the stock.

Source: EnCana: Earnings Preview