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Encana (TSX:ECA) Files Earnings, Plans To Move To US

Posted on October 31, 2019 by Dan Kent

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed below. Stocktrades Ltd may also be compensated via affiliate links in the post below.

Encana (TSX:ECA), a Canadian oil and gas producer  and large cap Canadian stock said Thursday it plans to change its name to Ovintiv Inc and establish a corporate presence in the United States. The company also happened to report third quarter earnings this morning, earnings that beat on both top and bottom lines.

Lets have a look at Encana’s earnings highlights before I speak about its rebranding strategy.

How did Encana (TSE:ECA) perform in the third quarter?

Overall, it was a fairly strong quarter for the natural gas producer. Revenue is up 45% year over year and operating income saw in increase of 84% over the same time period. Diluted earnings per share of $0.11 in the third quarter marks a near 300% increase from the $0.04 posted in the third quarter of last year, and on a year over year basis earnings per share are up 63% to sit at $0.18.

Net earnings saw a 282% increase in the third quarter compared to last, and are up over 515% year over year at $240 million.

In terms of production, the company increased its liquid production at its Motney resource by 22%, 13% at its Permian resource and 16% at Anadarko. Costs per barrel are also down from one year ago today to sit at the mid $11 range.

The company completed a $1.25 billion buyback program and has raised its dividend by 25% over the course of the year. This is a strong signal that Encana feels its stock price is not reflective of its true value, trading at only 4.95 earnings, 0.68 times book and an EV/EBITDA of 4.44, all of which are far below industry averages.

Strong growth of free cash flows remains a priority for the company, as it has generated $251 million in FCF in the third quarter and plans to continue in the fourth quarter. The company has stated free cash flows will primarily be used to strengthen Encana’s balance sheet.

Revenue came in well above analyst estimates at $1.771 billion when $1.4 billion was expected and earnings of $0.18 were right in line with estimates. The company raised production outlook after a strong third quarter, and overall financial numbers were strong for the company.

How will Encana’s move effect the stock moving forward?

It was a well known fact that the results of the Canadian federal election would have a huge impact on the oil and gas industry here in Canada, especially for smaller producers like Husky. The result of a liberal minority was bound to create waves in the industry, and Encana is the first major player to make a move, deciding to re-domicile in the United States and operate under a different name, Ovintiv.

The move to strip its Canadian branded name and move to the United States will not change how the company operates, according to to CEO Doug Suttles:

“How we operate the business and how we run the business will not change. There’ll be no movement of roles or responsibilities, no reduction in staff and actually no change to how we’re allocating capital,” – CBC News

I feel in the end, the move will ultimately benefit the company. Heading to the United States will allow the company to be exposed to a broader market base, including a larger pool of investors and index funds in the United States.

However, for the Canadian oil and gas sector, I would consider this one of the first of many more nails in the coffin to come for the Canadian energy industry. Companies are seeing the difficulty in operating here and are aiming to head for greener, more prosperous pastures. Buying stocks in the energy sector right now would require some long term patience.

The rebranding of the company will require a 1 to 5 share swap as well. For every 5 shares of Encana you own, you’ll be given 1 share of Ovintiv. That is of course if the move is approved by shareholders via a vote to be held in early 2020.

The market hasn’t taken the news well, as the stock is currently down nearly 7% this morning.

**Daniel Kent is long ECA.TO

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.