Encana Corp (ECA)
Today’s recommendation is a turnaround candidate from the natural gas space. After a long downward slide in its share price, the company is showing a willingness to get creative about increasing shareholder value, including selling assets and reducing its long-standing quarterly dividend. Results won’t be immediate, but could eventually attract...
Today’s recommendation is a turnaround candidate from the natural gas space. After a long downward slide in its share price, the company is showing a willingness to get creative about increasing shareholder value, including selling assets and reducing its long-standing quarterly dividend. Results won’t be immediate, but could eventually attract a new type of investor to the unloved stock. This long-term speculation is appropriate for patient, risk-tolerant investors.
Encana Corp (ECA)
from Canadian Edge
During a recent presentation at the Barclays CEO Energy-Power Conference, the new chief of Encana Corp (TSX: ECA, NYSE: ECA), Doug Suttles, indicated that, as part of a broader review of the company’s organizational structure, capital allocation and portfolio of assets, Encana’s current dividend rate is under review.
Mr. Suttles emphasized the importance of narrowing the development portfolio, with all of 28 projects being funded right now, and noted that Encana’s “capital allocation process is broken.”
Asset sales that help deemphasize the relative importance of dry natural gas within the overall portfolio are in the offing. A dividend cut, perhaps as much as 50%, in the face of declining cash flow and new management’s emphasis on profitability versus straight-up growth, is a strong possibility.
Encana, which has lost half of its market value since 2010, is also feeling pressure from major institutional investors to cut its payout. The stock is down 10.7% on a total return basis in U.S. dollar terms in 2013. The S&P/TSX Energy Index is up 2.45%.
Encana “isn’t focused enough” and needs to “clean up” its portfolio, said Mr. Suttles. Mr. Suttles, who became CEO of Encana in June, estimated North American gas prices will be “range-bound” between $3.50 per million British thermal units and $4.50 in the next few years, from an average of $3.69 so far this year and a low below $2 in April 2012.
The company posted cumulative losses of $3.7 billion from the fourth quarter of 2011 through the first quarter of 2013 due to falling gas prices. Analysts expect net income of $139.7 million for the third quarter and $167.3 million for the fourth.
Encana has more than 17 producing areas, compared with between one and seven for its peers, and is weighted more heavily toward less profitable dry gas. The company will likely dispose of dry gas assets as well as some emerging plays in order to reduce the number of opportunities it funds.
The goal is to focus on properties that will allow the company to remain profitable with natural gas prices at $3.50 to $4.50.
Encana’s stock-price decline began after natural gas prices started a slide in 2008, a year before Encana spun off its oil sands business to create Cenovus Energy (CVE). Cenovus’s market value is now 44% higher than its former parent.
To cope with falling gas prices, Encana has pursued a strategy of selling stakes in joint ventures to fund an expansion of its holdings in unconventional shale gas formations in regions such as northeastern British Columbia.
Encana certainly has assets that other gas producers would want to own. As attractive as these pieces are, and despite a solid record of execution on projects to which it devotes sufficient human and financial capital, Encana simply can’t get the most out of them and remain profitable, given its other cash commitments.
The company has properties in the Deep Panuke basin off the coast of Nova Scotia as well as leases in the U.S. Rocky Mountain states that it could sell. It also has land in Alberta and northern British Columbia as well as in parts of the U.S., including Colorado and Texas. The company has 75 years of production at current rates.
Seven analysts currently rate the stock a “buy” according to Bloomberg’s standardization of Bay Street/Wall Street broker-speak, while 13 rate it a “hold.” Six analysts rate Encana a “sell.” ... Encana, new to the Watch List this month, nevertheless earns up upgrade to speculative buy – for aggressive investors – up to $19.
David Dittman, Canadian Edge, www.canadianedge.com, 800-832-2330, October 4, 2013