Encana Returns to Quarterly Profit on Higher Gas Prices

Encana Corp., Canada’s largest natural gas producer, returned to a first-quarter profit as prices for the heating and power-plant fuel rose.

Net income of $116 million, or 16 cents a share, compared with a loss of $431 million, or 59 cents, a year earlier, the Calgary-based company said today in a statement. Excluding foreign exchange and hedging losses, Encana exceeded the 53-cent average of 17 analysts’ estimates compiled by Bloomberg by 17 cents.

Chief Executive Officer Doug Suttles will double Encana’s oil output with last week’s $3.1 billion purchase of Texas properties from Freeport-McMoRan Copper & Gold Inc. Suttles, who took over almost a year ago, also is selling assets to rebalance the company’s portfolio in favor of higher-priced oil and gas liquids.

“We expect Encana to outperform the broader energy group this morning,” as the company beat analysts’ estimates for production, cash flow and profit, Greg Pardy, an analyst at RBC Capital Markets in Toronto, wrote in a note today.

The shares rose 2 percent to C$25.09 at the close in Toronto.

Liquids production rose 56 percent from the first quarter of 2013, while gas output fell 2 percent to 2.8 billion cubic feet a day. Sales rose 78 percent to $1.9 billion.

Encana benefited from higher prices for gas in the U.S. Northeast, where supplies from its Deep Panuke project off Nova Scotia are sold.

On Hold

While the company has said it may look to sell the project at some point as it doesn’t fit with its strategy, “we believe the strong natural gas fundamentals would put such a sale process on hold,” Phil Skolnick, an analyst at Canaccord Genuity Corp. in New York, wrote in an April 25 note. Skolnick estimates the asset could be worth at least $2.3 billion.

Spot prices for gas in Boston and other parts of New England, where supplies from the project off Canada’s Atlantic Coast are delivered, rose 82 percent from a year earlier to average $20.9122 per million British thermal units. Canadian spot gas prices increased 75 percent to C$5.3013 a gigajoule, according to data compiled by Bloomberg.

Encana is seeking to also raise as much as C$861.3 million ($790 million) from the initial public offering of a royalty unit this month. The stock’s 28 percent gain since the Nov. 5 announcement of the IPO reflects a potential enterprise value for the PrairieSky Royalty unit of $4.1 billion, Skolnick said.

Capital Spending

PrairieSky will hold about 5.2 million acres (2.1 million hectares) of oil and gas properties in central and southern Alberta and pay dividends. Royalty properties generate revenue through levies paid by other producers drilling on the land.

Suttles said he would continue to “test the market” with gas assets for sale. “We’ll continue to look to divest of some of our positions,” he said on a conference call today.

Encana lowered its production target for 2014 to reflect the completed sale of its Jonah field in Wyoming and raised its cash flow estimate on expectations for higher fuel prices, Chief Financial Officer Sherri Brillon said on the call. The company won’t update its plans in the Eagle Ford shale in Texas until the purchase from Freeport-McMoRan closes, Suttles said.

Encana, which has seven buy, 14 hold and four sell recommendations from analysts, has risen 35 percent this year.