On Aug 19, 2014, Zacks Investment Research downgraded natural gas exploration and production (E&P) company – Encana Corporation (ECA) – to a Zacks Rank #3 (Hold), primarily due to an unfavorable natural gas pricing environment and weak second quarter earnings.

Despite the downtrend, the company still has the potential to drive the stock up. The stock is currently trading at a forward P/E of 12.3x – lower than the industry average of 25x − with long-term earnings growth expectation of 6%.

Why the Downgrade?

Since July end, natural gas has been trading below $3 per million Btu (MMBtu) as gas stockpiles in the underground storage is increasing at more than the average pace. As Encana mainly produces natural gas and is far more sensitive to gas price fluctuation than its peers, we can say that the company’s third quarter profit might be hurt by a weak pricing environment of gas.

Moreover, Encana posted weak second-quarter earnings last month owing to lower natural gas volumes − in the U.S. resource plays − and prices. The company announced operating earnings per share (excluding one-time items) of 23 cents, which failed to beat the Zacks Consensus Estimate of 28 cents. The bottom line also decreased 32.4% from the year-ago adjusted profit of 34 cents per share.

Additionally, with the growing popularity of renewable sources of energy such as wind and solar, Encana – the operator of natural gas resources − is facing tough competition. Although expensive, many customers are opting for this sustainable source of energy for its environmentally friendly nature.

Stocks to Consider

Stocks that look promising and are worth looking into now in the same industry are Cheniere Energy Inc. (LNG), Sanchez Energy Corporation (SN) and VOC Energy Trust (VOC). All these stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on ECA
Read the Full Research Report on SN
Read the Full Research Report on VOC
Read the Full Research Report on LNG


Zacks Investment Research