ENCANA CORP. $21 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 741.1 million; Market cap: $15.6 billion; Price-to-sales ratio: 2.3; Dividend yield: 1.5%; TSINetwork Rating: Average; www.encana.com) recently narrowed its focus from around 30 unconventional natural gas properties to just six. These fields also produce significant amounts of oil and natural gas liquids, such as butane and propane.
The company now expects that liquids will account for 75% of next year’s operating cash flow, two years ahead of its original target.
Encana’s revenue rose 31.8%, from $6.7 billion in 2009 to $8.9 billion in 2010 (all amounts except share price and market cap in U.S. dollars). It then fell to $5.2 billion in 2012. However, revenue recovered to $5.9 billion in 2013 and could reach $7.0 billion in 2014.
Earnings dropped from $2.35 a share (or a total of $1.8 billion) in 2009 to $0.54 a share (or $398 million) in 2011. They then rebounded to $1.35 a share (or $997 million) in 2012, but fell to $1.09 a share (or $802 million) in 2013.
Cash flow per share fell 47.6%, from $6.68 in 2009 to $3.50 in 2013.
Big acquisition looks promising
As part of Encana’s new strategy, it recently agreed to buy Athlon Energy Inc. (New York symbol ATHL), which produces oil (80% of output) and gas (20%) in Texas’s Midland Basin. Including Athlon’s debt, the deal is worth $7.1 billion.
To help pay for this purchase, Encana is selling less important properties. In the first nine months of 2014, it raised $6.5 billion from asset sales. The company ended the third quarter with long-term debt of $6.1 billion, or 44% of its market cap. It also held cash of $7.0 billion, or $9.41 a share.
The company will probably earn $1.32 a share in 2014, and the stock trades at 14.1 times that estimate. It’s also attractive at a low 4.0 times its likely 2014 cash flow of $4.65 a share. The $0.28 dividend yields 1.5%.
Encana is a buy.
