Topic: Energy Stocks

Controversial share buyback aims to build Encana Corp’s value

The company now plans to buy back up to $213 million U.S. of its common shares in a move that rewards investors.

It also continues to expand its operations, with a recent shale oil and natural gas acquisition in the U.S. adding debt but providing a strong foothold in that market.

The stock trades at just 2.1 times the company’s 2020 cash flow forecast.

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ENCANA CORP. (Toronto symbol ECA;, operates four key properties: Montney (B.C.), Duvernay (Alberta), and Eagle Ford and Permian (both in Texas). In addition to natural gas, these fields produce large amounts of oil and natural gas liquids.

In February 2019, the company completed its purchase of Newfield Exploration Co. (New York symbol NFX). That firm operates shale oil and natural gas wells in the Stack and Scoop fields of Oklahoma, the Bakken region of North Dakota and Utah’s Uinta basin.

Encana issued $5.5 billion in shares to Newfield investors (all amounts except share price in U.S. dollars). Its shareholders now own 63.5% of the combined company with Newfield shareholders holding the remaining 36.5%. Including that firm’s debt, the takeover was worth $7.7 billion.

To help pay for the purchase, Encana is selling some of its less-important properties. Those include a new deal for the sale of the company’s natural gas assets in Oklahoma’s Arkoma Basin for $165 million. Encana expects to complete the transaction in the third quarter of 2019.

The company also plans to buy back up to $213 million U.S. of its common shares (about 3% of the total) through a Dutch auction process.

Investors who want to participate must offer their shares for between $4.70 U.S. and $5.40 U.S. (in increments of $0.05 U.S.) before August 14, 2019. The final sales price will be the lowest amount within that range at which Encana can buy the most shares for $213 million U.S. The company will then pay that price for all shares tendered at or below it. If you tender at a higher price, Encana will return your shares. The transactions are commission-free.

Energy Stocks: How to handle the buyback tender

We still like Encana for its high-quality reserves and low operating costs. However, the stock has slumped 10% since it announced the buyback plan. That’s mainly because investors would prefer the company to pay down the debt it took on to buy Newfield; as of March 31, 2019, its long-term debt was $6.3 billion U.S., or a high 111% of its current market cap of $7.5 billion (Canadian).

Nonetheless, share repurchases raise earnings per share and other per-share calculations, which gives the remaining shareholders a larger stake in the company.

If you want to lower your Resources exposure, tender your Encana shares at the top price of $5.40 U.S. ($7.15 Canadian). Or, if you need to sell a small lot (less than 100 shares), then tender at the market price just before the offer closes. That way, you increase your chances of selling your shares—without paying brokerage fees.

Encana has raised its quarterly dividend by 25.0%, to $0.01875 a share from $0.015. The new annual rate of $0.075 yields 1.8%.

The stock trades at 2.1 times Encana’s projected 2019 cash flow of $2.00 U.S. a share.

Recommendation in The Successful Investor: Encana Corp is a buy.


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