Encana Corp. $62 - Toronto symbol ECA

ENCANA CORP. $62 (Toronto symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 761.3 million; Market cap: $47.2 billion; SI Rating: Average) is one of North America’s largest producers of natural gas (80% of total production) and oil (20%). In the past few years, EnCana has sold most of its conventional properties to focus on what it calls “key resource plays”, including oil sands and early-stage gas developments. These assets cost more to develop, at least initially, but should last much longer than its older properties. Another project EnCana has high hopes for is the Deep Panuke offshore gas field near Nova Scotia. The company has received tentative regulatory approval for its plan, and aims to begin operations in 2010. To help offset the high cost of developing its oil sands properties, EnCana recently formed two joint ventures with U.S.-based ConocoPhillips — one to extract the heavy oil, and one to refine it. The arrangement should speed up development, and cut En- Cana’s risk. EnCana’s total revenue in the first quarter of 2007 fell to $4.4 billion from $4.8 billion a year earlier (all amounts except share price and market cap in U.S. dollars). But earnings before unusual items rose 37.5%, to $1.10 a share (total $858 million) from $0.80 a share ($694 million), while cash flow per share grew 14.8%, to $2.25 from $1.96. The ConocoPhillips deal will also let EnCana cut its capital spending, from $8.05 U.S. a share in 2006 to $7.15 U.S. in 2007. That let EnCana double its annual dividend rate, from $0.40 U.S. a share to $0.80 U.S. (1.4% yield). It also freed up more cash for share buybacks. EnCana repurchased $1.1 billion U.S. worth of its stock in the first quarter. Total production will probably increase only marginally in 2007, as it will take several more months for its oil sands operations to reach full capacity. Shortages of steel and other materials are also hindering EnCana’s expansion plans. But the company’s strategy puts it in a good position to expand profits as energy prices rise. The stock now trades at 13.2 times the $4.25 U.S. a share it will probably earn in 2007. It’s also cheap at just 5.8 times its predicted 2007 cash flow of $9.65 U.S. a share. EnCana is a buy.