EnCana Corp. $57 – Toronto symbol ECA

ENCANA CORP. $57 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; SI Rating: Average) produces oil and natural gas, mostly in the western part of North America. Natural gas accounts for three-quarters of its production.

In the past few years, the company has focused on unconventional gas reserves in the Rocky Mountains. These discoveries initially cost more to develop than conventional reserves. But they could last decades longer, particularly as new technology helps EnCana extract more gas. In fact, EnCana estimates that its unbooked reserves are 1.3 times the size of its proved reserves.

The company also wants to expand its oil sands production 10-fold over the next decade, and a new partnership with U.S.-based ConocoPhillips should help it reach this goal with much less risk.

The partners will form two separate joint ventures — one in Canada to develop and operate EnCana’s oil sands assets, and one in the United States, which will operate heavy oil refineries in Illinois and Texas. Both joint ventures will operate as independent entities, and will be free to sell oil (or buy it) at the best possible price.

EnCana’s earnings from continuing operations in the three months ended September 30, 2006 shot up to $1.63 a share (total $1.3 billion) from $0.40 a share ($348 million) a year earlier (all amounts except share price in U.S. dollars). If you exclude one-time items, earnings grew 63.8%, to $1.31 a share from $0.80. Cash flow per share rose 4.5%, to $2.30 from $2.20, while revenue grew 30.0%, to $3.9 billion from $3.0 billion.

Due to rising uncertainty over energy prices and project costs, EnCana plans to scale back capital spending in the next few months. It will use any excess cash to buy back stock; it spent $3.0 billion on buybacks in the first nine months of 2006.

The stock has moved down lately with energy prices, and now trades at 12.8 times the $3.96 U.S. a share it should earn this year. It’s also attractive at just 6.1 times projected cash flow of $8.28 U.S. a share. The $0.40 U.S. dividend yields 0.8%.

EnCana is a buy.

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