Encana Corporation (TSX:ECA)(NYSE:ECA), one of the largest producers of natural gas and natural gas liquids in North America, announced first-quarter earnings before the market opened on May 12, and its stock responded by falling about 1% in the day’s trading session. Let’s take a thorough look through the quarterly report to determine if we should consider using this weakness to initiate long-term positions, or if we should avoid the stock for the time being.
Low commodity prices and increased expenses lead to weak results
Here’s a summary of Encana’s first-quarter earnings results compared with its results in the same period a year ago. All figures are in U.S. dollars.
| Metric | Q1 2015 | Q1 2014 |
| Earnings Per Share | ($2.24) | $0.16 |
| Revenues, Net of Royalties | $1.25 billion | $1.89 billion |
Source: Encana Corporation
In the first quarter of fiscal 2015, Encana reported a net loss of $1.71 billion, or $2.24 per share, compared with a net profit of $116 million, or $0.16 per share, in the same quarter a year ago, as its revenues, net of royalties, decreased 34% to $1.25 billion.
Encana’s very weak results can be attributed to two primary factors. First, commodity prices have fallen dramatically over the last year, which resulted in a $1.92 billion ceiling test impairment in the first quarter and led to its average realized selling price of natural gas decreasing 17.9% to $4.78 per thousand cubic feet and its average realized selling price of oil and natural gas liquids decreasing 45.3% to $37.83 per barrel. Second, the company was negatively impacted by the weakening of the Canadian dollar against the U.S. dollar, which resulted in a $656 million foreign exchange loss.
Here’s a quick breakdown of eight other notable statistics from the report compared with the year-ago period:
- Total production decreased 19.8% to 430,100 barrels of oil equivalents per day
- Production of natural gas decreased 33.9% to 1.86 trillion cubic feet per day
- Production of oil and natural gas liquids increased 77.8% to 120,700 barrels per day
- Total operating expenses increased 123.3% to $3.9 billion
- Cash flow decreased 54.8% to $495 million
- Operating earnings decreased 98.3% to $9 million
- Cash provided by operating activities decreased 48.9% to $482 million
- Ended the quarter with $2.03 billion in cash and cash equivalents, an increase of 500.6% from the beginning of the quarter
Also, on May 11, Encana announced that it will be maintaining its quarterly dividend of $0.07 per share, and the next payment will come on June 30 to shareholders of record at the close of business on June 15.
Is now the time to buy shares of Encana?
The first quarter was far from impressive for Encana, so I think the post-earnings drop in its stock is warranted. I also think investors should avoid the stock until commodity prices recover and until the Canadian dollar strengthens because these headwinds will continue to dampen the company’s quarterly results and prevent the stock from sustaining a rally.
With all of the information provided above in mind, I think Foolish investors should avoid Encana’s stock and look elsewhere in the industry for an investment today.
