ENCANA CORP. $47 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; WSSF Rating: Average) is a leading Canadian energy company. Natural gas accounts for about 75% of its production.
In the past two years, EnCana has sold most of its overseas assets and conventional properties to focus on early-stage natural gas fields in North America.
These properties are located mainly in remote mountainous areas, which makes them more expensive to develop.
However, these unconventional fields could last decades longer than the assets it sold, and EnCana feels that this outweighs the high initial development costs.
EnCana is also expanding its operations in Canada’s oil sands region. These projects are highly complex, so costs are difficult to estimate. That’s why EnCana is now thinking about spinning off its oil sands assets, probably through a merger with a larger producer.
In the three months ended March 31, 2006, EnCana earned $1.70 a share, compared with a loss of $0.05 a year earlier, mostly due to a hedging plan that shielded it from falling natural gas prices. Cash flow per share grew 26.5%, to $1.96 from $1.55, while revenue jumped to $4.7 billion from $2.0 billion.
EnCana just raised its quarterly dividend 33.3%, from $0.075 a share to $0.10. The new annual rate of $0.40 yields 0.9%. The stock trades at 5.6 times its projected 2006 cash flow of $8.38 a share, and at 12.6 times the $3.72 a share it should earn this year.
We like EnCana’s long-term strategy. But rising production costs hurt its profits, particularly now that energy prices are moving down.
EnCana is a hold.