$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ ENCANA CORP. $20 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 736.3 million; Market cap: $14.7 billion; Price-to-sales ratio: 1.6; Dividend yield: 4.1%; TSINetwork Rating: Average; www.encana.com) is one of North America’s largest natural gas producers. Its reserves should last over 11 years.
The company took its present form on December 1, 2009, after the old EnCana Corp. split itself into two new companies: the new Encana, which focuses on natural gas, and Cenovus Energy (Toronto symbol CVE), which specializes in oil sands projects, oil refineries and conventional natural gas.
Low gas prices weighed on results
As a separate company, Encana’s revenue fell 4.5% in 2011, to $8.5 billion from $8.9 billion in 2010 (all amounts except share price and market cap in U.S. dollars). That’s because new techniques, such as horizontal drilling, have unlocked large amounts of shale gas. This has boosted inventories and cut prices.
Earnings fell 33.3%, to $0.54 a share (or a total of $398 million) from $0.81 (or $598 million). Cash flow per share fell 5.4%, to $5.66 from $5.98.
Encana now aims to triple production of higherpriced oil and natural gas liquids (NGLs), such as ethane, propane and butane, by 2015. As a result, the company will spend an extra $600 million on its oil and NGL properties this year. It had originally planned to spend $2.9 billion on all of its capital projects in 2012. The new total of $3.5 billion is roughly equal to Encana’s projected 2012 cash flow.
In 2013, Encana aims to spend $4 billion to $5 billion to develop its properties. That’s more than its likely cash flow of $2.5 billion to $3.5 billion. However, it plans to make up that difference by selling some of its less important properties.
Still plenty of cash for dividends
The extra spending could hurt Encana’s ability to keep paying quarterly dividends of $0.20 a share, for an annualized yield of 4.1%. These payments total roughly $590 million a year. However, the company holds cash of $2 billion, or about $2.70 a share, so the dividend still seems safe.
Encana has locked in selling prices for 64% of its likely 2012 gas production at $5.80 per thousand cubic feet and 17% of its 2013 output at $5.24. These prices are well above today’s level of $2.85.
Ready to tap into new markets
Even without these hedges, Encana’s long-term outlook remains bright. It owns 30% of a proposed terminal in B.C. that will convert gas to a liquid. From there, tankers will ship the gas to Asia, where gas sells for double North American prices.
Low natural gas prices are also prompting more power utilities to convert from coal to gas. That should help spur long-term demand for gas.
The stock trades at a high 18.7 times Encana’s forecast 2012 earnings of $1.05 a share. However, it trades at a more reasonable 4.2 times its projected cash flow of $4.67 a share.
Encana is a buy.
