EnCana Corp. $60 – Toronto symbol ECA

ENCANA CORP. $60 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 750.3 million; Market cap: $45.0 billion; SI Rating: Average) is a leading North American producer of natural gas and oil. Natural gas accounts for 80% of its production. EnCana prefers to focus on what it calls “key resource plays”. These are unconventional properties, such as early-stage gas fields and oil sands projects, which have much longer production lives than conventional properties. EnCana has postponed its plan to break itself up into two separate companies — one focusing on natural gas, the other on oil sands and oil refineries. That’s because falling energy prices and the problems in the credit markets make it difficult for the two new smaller companies to raise capital to fund new projects. Meanwhile, EnCana continues to profit from a hedging program that locked-in selling prices. In the third quarter of 2008, earnings soared to $4.73 a share (total $3.6 billion) from $1.24 a share ($934 million) a year earlier. (All amounts except share price and market cap in U.S. dollars.) Hedging gains contributed $2 billion to the latest quarterly earnings. If you disregard all unusual items, earnings per share rose 40.1%, to $1.92 from $1.37. Cash flow per share rose 27.6%, to $3.74 from $2.93. Hedging contracts will lock in prices for about 60% of EnCana’s natural gas production in 2009 at an average price of $9.15 U.S. per 1,000 cubic feet. That’s 36% higher than the current spot price of $6.70 U.S. per 1,000 cubic feet. EnCana should earn $6.42 U.S. a share in 2008, and the stock trades at just 7.4 times that estimate. It also trades at just 3.6 times its cash flow of $13.20 U.S. a share. The $1.60 U.S. dividend yields 3.4%. EnCana is a buy.

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