TD Comment on ECA Event
Yesterday, Encana Corp. (ECA-T) held its investor day in New York, where it provided
an update on the five-year plan that it first presented this time last year. We are
encouraged to see ECA tracking ahead of its original plans, and although several
of yesterday's developments had been recently disclosed, it was the clear, positive
culmination of all of its efforts that mattered, in our view. We highlight that capital
productivity, margins, cash flow, and leverage have all improved by >10% vs. the
original plan, notwithstanding a US$5/bbl lower WTI price assumption.
Impact: POSITIVE
Since the rollout of ECA's original five-year plan, it has: 1) grown its premium
locations inventory by 20%; 2) improved core four type curves between 20-45%
(while mitigating cost inflation); and 3) high-graded the portfolio to the point where
the core four now comprise 90% of total production (Exhibit 1).
ECA's production and cash flow growth targets are relatively unchanged at US
$50/bbl WTI and US$3/mmBtu NYMEX gas (10-15% five-year production CAGR,
25% cash flow CAGR).
ECA believes that well-level IRRs of >35% should translate into corporate ROCEs
of 10-15%.
ECA still expects to grow within cash flow in 2018 and sees free cash flow
generation from 2019. Meanwhile, leverage is expected to fall below 2.0x Debt/
EBITDA in 2018 (and ≤1.5x 2019+).
ECA noted that given its market diversification and hedging efforts, only 4% of
2018 revenues are exposed to AECO spot prices. It has also secured 100% firm
transport capacity aligned with its Montney growth projections.
TD Investment Conclusion
We upgraded ECA to BUY from Hold back in June. Since that time, it has
outperformed both the Canadian and U.S. energy indicies. It remains one of our
top picks in the large-cap universe, given significant leverage to the top North
American liquids-focused resource plays—the Montney and the Permian. For 2018,
we will be looking for continued execution, self-funded growth, and improving
corporate returns. However, given the recent share-price outperformance, ECA is
now effectively trading in line with its North American peers on 2018 consensus EV/
EBITDA (7.1x vs. the group at 7.3x).