Encana Corp. (TSX:ECA) and Talisman Energy Inc. (TSX:TLM) are both in the process of shrinking. Instead of throwing money at an array of different projects, the two are concentrating on the most lucrative regions and prioritizing profitability over production growth.
Talisman will post its results for the full year and fourth quarter on Wednesday, while Encana's report is on deck for Thursday. Analysts are expecting lower quarterly earnings for both companies compared with a year earlier, according to estimates compiled by Thomson Reuters.
Under the leadership of CEO Doug Suttles, who took the helm in June, Encana is no longer juggling operations in dozens of different areas. Instead, it's now focused on just five North American regions: the Duvernay and Montney in Western Canada; the San Juan in New Mexico; the DJ Basin in Colorado and Tuscaloosa Marine in Louisiana.
Investors seem to like where Encana is going, said AltaCorp Capital analyst Dirk Lever.
"I think people do really appreciate the clearer vision," he said. "Execution will be key."
One of the key themes in the industry lately has been strengthening North American natural gas prices, he said. A prolonged stretch of bitter cold throughout the continent has driven up demand for the home-heating fuel.
That's expected to be good news for Encana's Deep Panuke natural gas project in offshore Nova Scotia, which started up late last year after repeated delays.
"It's up and running and some days the price that they've been able to get for any natural gas sold has just been ridiculously high," said Lever.
"Those are extremes. I think that given the strength in natural gas very recently, that'll be a positive. It's just a matter of how long does it stay in place? And the longer it's in place, the better off it's going to be for Encana."
Natural gas storage levels have fallen to a nine-year low, analysts with Desjardins Securities noted in a recent report.
"While we continue to believe that higher gas prices will ultimately lead to higher gas production and a switch back to other fuel sources, our quick math suggests that we may not get back to 'normal' storage levels until late in the injection season, which should help provide some support to gas prices through the summer months," the Desjardins analysts said.
Analysts from RBC Capital Markets said in a recent research note that while Encana has been trying to sell assets lately, it's not pursuing a "fire sale."
"This is a nice place to be —and a far cry from years past when Encana had set disposition targets to fund its capital program."
Like Encana, Talisman has been paring down its portfolio, chucking the riskier, more adventurous exploration projects. Since taking over in September 2012, CEO Hal Kvisle has focused Talisman's attention on two core areas: the Americas, which includes shale oil and gas in North America and oilfields in Colombia, and Southeast Asia.
First Asset Investment Management portfolio manager John Stephenson described Talisman's offshore operations in Norway and the U.K. as an albatross around the company's neck. He's expecting Talisman to announce reserve writedowns on those North Sea properties, which have faced a litany of operational issues.
"It's an asset that is a money loser for them and to come clean, write it down, I think that's the prudent thing to do," he said.
"Any kind of action on the North Sea, even if it's ugly, is better than just a continued slow drip drip drip of problems."
Meanwhile, Stephenson said he isn't expecting to see a particularly strong quarter from oilsands giant Cenovus Energy Inc. (TSX:CVE), which also reports its earnings Thursday. The price gap between heavy crude, like that produced in the oilsands, and light oil widened late last year.
But with new pipelines, such as the southern leg of TransCanada Corp.'s Keystone XL system, starting up and more railcars moving crude, there should be some relief, he said.
The Desjardins analysts were also optimistic, writing that "we continue to have a positive bias toward the heavy oil producers,"
For Husky Energy Inc. (TSX:HSE), which reports on Wednesday, investors will likely be looking for some clarity on when its massive Liwan offshore natural gas platform in the South China Sea will start up. That company has also been bolstering its heavy oil business in Western Canada and is expected to start up its Sunrise oilsands project later this year.
"I think overall the story is becoming a much better story," said Stephenson. "It's just already priced into the stock at this point."
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