For Canadian energy firm EnCana (ECA), the last few years haven’t been exactly all too rosy.
Wrong-way bets on just which energy commodity would be king sent shares spiraling downward. Losses mounted and the firm was forced to cut its once-rich dividend. All seemed lost for the energy producer and investors in ECA stock.
Well, times are a-changin’ for ECA.
With a new CEO, new attitude and a hefty dose of liquids-rich assets, EnCana has come roaring back. And yet, it’s just the start of good things at the Canadian energy firm. For investors, there’s plenty to like at ECA — and the time to buy the stock could be now.
A Spinoff and a Misstep at ECA
$15 per million British thermal units (MMBtu) priced natural gas. That was the reality just a few years ago, when EnCana decided to go whole hog and become a dedicated dry natural gas producer. ECA decided to spin off its oil and liquids assets as Cenovus Energy (CVE) in order to take advantage of the faster and better growth prospects in the natural gas patch.
Well, like so many natural gas producers, fracking made a fool of the company.
The sheer abundance of production drove natural gas prices downward to historic lows: At one point prices for the fuel threatened to break the $1 per MMBtu mark. Needless to say, it becomes very hard to make any sorts of profits at those price levels. Oil-rich Cenovus has flourished, while ECA has spent much of the past few years licking its wounds.
That is, until Doug Suttles became CEO and EnCana began the transformation of building itself back into one of Canada’s premier energy concerns. That has meant adding back in a hefty dose of oil and natural gas liquids (NGLs) into its production mix.
To accomplish this shift, EnCana has had to sell much of its natural gas portfolio. So far, EnCana has sold or agreed to sell roughly $4.1 billion worth of dry gas assets — including 360,000 net acres in the northwestern Alberta Bighorn region for about $1.8 billion to privately held Jupiter Resources.
And it didn’t waste any time spending that cash on oil and NGLs.
EnCana recently closed a deal to buy roughly 45,500 net acres in the fertile Eagle Ford shale from Freeport-McMoRan (FCX) for about $3.1 billion. This massive purchase right in the heart of oil country only strengthens its other recent buys. ECA now controls a vast expanse of liquids-rich acreage in New Mexico’s San Juan Basin, Colorado’s DJ Basin, the Tuscaloosa Marine Shale and Canada’s Montney and Duvernay shales. What’s more, ECA has signaled that more than 75% of its capital spending will occur in these six core oil and NGLs regions this year.
Turnaround for EnCana
And with the focus now on liquids and oil, the profits have finally started to roll back in at ECA. Production of oil jumped by over 56% to reach 68,000 barrels per day. EnCana finally became profitable once again after suffering for several quarters under the weight of low natural gas prices.
For the first quarter of the year, ECA managed to earn $431 million, or $0.16 per share. While that may not seem like that much, it actually was a massive 192% increase in earnings per share versus a year ago. At the same time, EnCana realized an 87% pop in its cash flows for the quarter.
This huge increase in profits shows just how well the turnaround is working. And it’s only the beginning for ECA stock.
EnCana has plans to continue spending heavily on drilling and acquiring other liquids-rich assets for the next few years. The firm’s newfound cash flows, war chest from asset sales and $4 billion in undrawn credit facilities will make that job easier. All in all, EnCana predicts that by 2017, liquids production will account for more than 75% of its upstream cash flows, and the sheer growth in that production will help boost cash flows by 10% each year.
It’s Time to Buy ECA Stock
For investors, the turnaround at EnCana is finally here. The current management seems to making all the right moves in turning to increasing higher-priced oil and liquids production — if the plan plays out, shareholders will be richly rewarded.
Those higher cash flows can be used to retire EnCana’s debt or boost production via bolt-on acquisitions or higher capex spending. They can also do wonders for the stock price. I won’t be surprised when EnCana reinstates its sector-beating dividend. Analysts have also postulated that ECA could be one of the best candidates for a share buyback. With market cap of only around $16 billion, any sort of real program would seriously reduce the number of shares outstanding and boost remaining shares even further.
ECA stock is one of the cheapest in the oil patch, with a forward P/E of just 12. That’s less than its former subsidiary CVE. And yet, the growth prospects for EnCana seem greater. That disconnect could explain why analysts have an average price target of $28 for ECA stock — about 28% higher than today’s price.
The turnaround at EnCana is at hand. The time to buy ECA stock is now.
At the time of publication, Levitt had no positions in the stocks mentioned.