After weeks of stagnation, Encana (NYSE:ECA) is poised for bigger things. The Canadian exploration and production company completed its purchase of Newfield Exploration in February. ECA stock could finally see a move higher for a couple of reasons.
This makes Encana the second-largest producer of unconventional resources in North America. More important, the company also appears poised to benefit from rising oil prices.
Due to the increasing value of its unconventional energy, Encana stock looks poised to drill for increasing value.
ECA Stock and an Oil-Focussed Approach
Based in Calgary, Alberta, Encana owns key assets in the Duvernay and Montney resources in the Canadian Rockies. ECA also benefits from substantial holdings in Texas’s Permian Basin and Eagle Ford shales.
Now, the Newfield deal brings access to fields in the Anadarko Basin in Oklahoma. Moreover, much like its embattled peer Chesapeake Energy (NYSE:CHK), it moves to decrease its dependence on natural gas. Thanks to the assets from Newfield, liquids will now make up more than 50% of the company’s total production.
ECA also has moved to enhance its financial stability. It has paid down more than half of the debt it had built up from the energy boom in the early part of the decade.
Holding $3.7 billion in long-term debt may look heavy compared to its $7.45 billion in stockholders’ equity. Still, it compares well to close competitors such as Marathon Oil (NYSE:MRO) and larger peers such as ConocoPhillips (NYSE:COP)
The Encana Recovery
Since hitting lows in 2016, revenues have trended higher every year. The company returned to profitability in 2017. Despite falling back this year, analysts expect profit growth to resume next year. On average, Wall Street forecasts 12.52% earnings growth per year over the next five years for ECA. And this stands despite a forward price-to-earnings (PE) ratio of only 7.6.
In some respects, one can understand the low multiple. Encana operates in the volatile upstream oil market. Exploration and production companies depend on higher oil prices to remain profitable. Hence, ECA and its peers will likely take a hit if another oil price slump occurs.
Indeed, the oil price slump of late last year took the stock from the $13 per share level to as low as $5 per share by late December. It quickly recovered to the $7 per share level by mid-January. However, ECA has seen little movement since then.
OPEC and ECA stock
That could change. Due to the Newfield deal, Encana raised its dividend from 1.5 cents to 1.9 cents per share every quarter. Moreover, ECA shareholders appear positioned to receive a much larger “payout” thanks to OPEC.
As oil prices go so goes upstream oil stocks. This becomes even more true for ECA as the production of liquids becomes increasingly important. Members of OPEC and ten non-OPEC countries instituted production cuts in early January. This had led to a substantial turnaround.
WTI Crude briefly traded below $43 per barrel in late December. Now with the reductions, prices have rebounded above $60 per barrel. If the market can sustain or exceed that price point on oil, ECA \will probably receive the boost it needs to return to double-digit price levels.
Final Thoughts on ECA Stock
Due to a de facto status as a proxy for oil price, ECA stock should rise along with these prices. The recent purchase of Newfield makes Encana more of an oil than a natural gas company.
For this reason, it stands to benefit more from rising oil prices than it had in the past. Now, with the OPEC-led production costs pushing oil prices higher, its drilling activity should lead to more profits.
As things stand now, the production cut will only hold until the end of June. Admittedly, if production cuts end and prices fall back, the near-term investment prospects could fall apart. Still, for at least the next three months, investors should like what they see from ECA stock.
As of this writing, Will Healy is long CHK stock. You can follow Will on Twitter at @HealyWriting.