Will Crude Transition Drive Encana's (ECA) Q2 Earnings?

Canadian oil and natural gas producer Encana Corporation ECA is expected to release second-quarter 2018 results on Wednesday, Aug 1. The current Zacks Consensus Estimate for the quarter under review is a profit of 9 cents on revenues of $1,140 million.

In the preceding three-month period, the company reported operating earnings per share of 16 cents, beating the Zacks Consensus Estimate of 13 cents. Increased liquids production along with higher price realizations drove the outperformance.

As far as earnings surprises are concerned, the Calgary, Alberta-based upstream operator is on a solid footing, having gone past the Zacks Consensus Estimate three times in the last four reports. This is depicted in the graph below:

Encana Corporation Price and EPS Surprise

Encana Corporation Price and EPS Surprise | Encana Corporation Quote

Investors are keeping their fingers crossed and hoping that Encana surpasses earnings estimate this time too. However, our model indicates that the company might not beat on earnings this time around.

Let’s delve deep to find out the factors likely to impact Encana’s second-quarter results.

Factors to Consider This Quarter

We believe that the improving oil price environment amid a favorable shift in Encana’s product mix toward the commodity bode well.

Few years back, natural gas accounted for around 95% of Encana’s output. In the last reported quarter, the figure came down to 55%, chiefly due to a slew of acquisitions and divestitures since 2013 that has repositioned its asset base. The transition to crude – which are generally more profitable to churn out than natural gas because of higher price realizations – is a big positive for the company going into the second quarter.

As it is, benchmark crude oil prices have risen sharply over the past year. At the end of the second quarter, oil was trading at around $74 per barrel – in a sweet spot compared to the corresponding period of 2017 when crude futures hovered around the $46 per barrel mark.

However, creeping service cost inflation remain an issue as rising prices might reduce profit margin.

What Does Our Model Say?

Our proven model does not conclusively show that Encana will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat consensus estimates. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -6.92%.

Zacks Rank: Encana is #3 Ranked. Though a Zacks Rank of 3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult. 

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

While earnings beat looks uncertain for Encana, here are some firms from the energy space you may want to consider on the basis of our model, which shows that they have the right combination of elements to post earnings beat this quarter:

Murphy Oil Corp. MUR has an Earnings ESP of +5.99% and a Zacks Rank #2. The firm is expected to release earnings on Aug 8. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Marathon Oil Corp. MRO has an Earnings ESP of +1.40% and a Zacks Rank #2. The company is likely to release earnings on Aug 1.

Jones Energy, Inc. JONE has an Earnings ESP of +2.47% and a Zacks Rank #3. The company is anticipated to release earnings on Aug 2.

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Encana Corporation (ECA) : Free Stock Analysis Report
 
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