CKUA

[Arctec]

EnCana cut to ‘sell' at Citigroup

ROMA LUCIW
Friday, December 15, 2006
A major U.S. brokerage has slapped a ‘sell' rating on EnCana Corp., a bearish assessment based on skyrocketing costs, reduced spending and the notion that things are unravelling quickly for Canada's largest energy company.

“While EnCana appears to be taking prudent steps to reduce capital spending and divert excess cash towards shareholders, we are concerned that the company is struggling against a portfolio that is more than fully valued,” Citigroup Inc. analyst Gil Yang, based in New York, wrote in a research note.

He downgraded EnCana all the way from ‘buy' to ‘sell', and chopped his price target 22 per cent to $47 (U.S.) from $60, citing concerns about the quality of the Calgary-based company's portfolio. The analyst also trimmed his fourth-quarter, 2007 and 2008 earnings estimates.

Shares of EnCana, which have risen 8.6 per cent so far this year in Toronto, fell $3.60 (Canadian) or 5.93 per cent to $57.09 on Friday. The New York-traded stock lost $2.34 (U.S.) or 4.47 per cent to $50.01. It has risen 11 per cent in 2006.

EnCana itself lowered its 2007 guidance on Thursday, forecasting that output will be about 713,000 barrels a day after royalties, down from 717,000 expected this year. The company also said it would cut spending by 6 per cent as it spends less on drilling in 2007 and transfers half of its oil sands business to a partner.

EnCana's board did, however, decide to double the quarterly dividend in 2007, leading to an annual payout of 92 cents (Canadian), up from 46 cents.

Mr. Yang noted that the “disappointing” 2007 forecast for 1 per cent overall production growth is lower than the goal EnCana executives had set out just five weeks ago at an investor day in Calgary and New York.

Just over a month ago, the company changed course and introduced a new strategy of building value. At the time, it looked to increase natural gas production by 5 per cent each year, down from an earlier goal of 10 per cent, and to return excess cash to shareholders.

As of Thursday, the company is forecasting 2007 production growth of just 3 per cent for natural gas and a 5 per cent decline for oil, an overall target of 1 per cent growth.

“Our biggest concern is that despite the effort on capital discipline, the company has already made in 2006, finding and development costs appear to have sky rocketed by 25 to 50 per cent in 2006,” Mr. Yang said. That rise is happening in an inflationary environment of only 12 to 15 per cent this year.

Operating costs at EnCana are rising rapidly as well, and the company's efforts to farm out acreage to other firms will take time to pay off.

“Even in the absence of the problems the company appears to have in its portfolio, we feel that EnCana shares are fully valued,” Mr. Yang said. “With our lack of confidence that the portfolio can deliver adequate returns in the current environment, we think that the stock is overvalued.”

Analysts who follow EnCana stock are divided on its prospects. According to those tracked by Bloomberg, 14 have a “buy” rating, nine have a “hold,” and four have a “sell.”

With files from reporter David Ebner.