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Energy stocks: Encana cuts its dividend and sells assets to invest in key projects

Encana Corp

Leading oil producers are positioning themselves to survive the oil and gas slump, and to thrive when prices begin to rise again. Encana Corp. has slashed its dividend and sold assets, and will focus on low-risk properties. The moves should ensure that Encana survives any prolonged period of low prices, and sets it up for big gains when oil starts to recover. We view Encana as an energy stock to buy for conservative investors looking for long-term gains.

ENCANA CORP. (Toronto symbol ECA; fell 10% this week after cutting its dividend and 2016 capital spending plans.

In response to the weak outlook for oil and natural gas, Encana has cut its quarterly payout by 78.6%, to $0.015 a share from $0.07 (all amounts except share price in U.S. dollars). The new annual rate of $0.06 yields 1.1%. Encana will also eliminate the 2% discount it offers to shareholders who reinvest their dividends in additional shares. In all, these moves will save it $185 million a year.

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As well, the company will spend $1.5 billion to $1.7 billion to expand and upgrade its properties in 2016. That’s down about $600 million from 2015.

Of the total 2016 spending, 95% will go to Encana’s four main properties: Montney (B.C.), Duvernay (Alberta) and Eagle Ford and Permian (both in Texas).

Meantime, the company continues to sell less important properties, which will cut its 2016 production to between 340,000 and 370,000 barrels of oil equivalent a day, down from 398,300 in the third quarter of 2015. Encana raised $2.7 billion in 2015 through the sale of these properties.

These sales are part of the company’s plan to focus on four key projects: Montney (B.C.), Duvernay (Alberta) and Eagle Ford and Permian (both in Texas). These fields produce large amounts of oil and natural gas liquids, such as propane and butane, which cuts Encana’s reliance on natural gas. They’re also efficient, which helps the company cope with low oil and gas prices.

Energy stocks: Encana has manageable debt

Encana should generate cash flow of $1.0 billion to $1.2 billion in 2016, so it will have to borrow some of the funds it needs for these improvements. The company’s balance sheet is in good shape: as of September 30, 2015, its long-term debt was $7.8 billion, or a high 171% of its currently depressed $6.3-billion (Canadian) market cap (the value of all outstanding shares). However, it doesn’t have to start repaying these loans until 2019. It also held cash of $352.0 million.

Because of its asset sales, Encana’s production fell 15.4% in the three months ended September 30, 2015, to 398,300 barrels a day (65% gas and 35% oil and natural gas liquids) from 470,600 a year earlier.

As well, its realized gas prices, which include the benefit of hedging contracts, fell 7.9%, while oil prices declined 45.3%.

As a result, Encana lost $24 million, or $0.03 a share, in the latest quarter. A year earlier, it earned $281 million, or $0.38 a share.

Cash flow per share dropped 59.6%, to $0.44 from $1.09, while revenue declined 42.6%, to $1.3 billion from $2.3 billion.

The company has decided to begin $150 million worth of work on its Permian property now instead of waiting until next year. As a result, it probably spent $2.2 billion on capital projects for all of 2015, compared to $2.5 billion in 2014.

Encana is still a buy for long-term gains.

Recommendation in The Successful Investor: BUY

For a recent report on a major Canadian energy company whose integrated operations make it suitable for conservative investors, read  Diversified operations give Imperial Oil top spot among Canadian energy stocks.


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