EnCana Corp. $59 - New York symbol ECA

ENCANA CORP. $59 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 753.3 million; Market cap: $44.4 billion; WSSF Rating: Average) is one of North America’s leading producers of natural gas. The company prefers to focus on early-stage properties in Alberta and the U.S. Rockies. These assets cost more to develop, at least initially, but should last much longer than conventional gas fields. Natural gas accounts for 80% of its production. EnCana is also active in Alberta’s oil sands region. But extracting the heavy, tar-like oil sands is much more costly than operating regular oil wells. That’s why EnCana recently folded its oil sands assets into two joint ventures with ConocoPhillips— one to operate the oil sands, and one to refine heavy oil. The two ventures operate independently of each other. In the second quarter of 2007, earnings before hedging gains and other one-time items jumped 83.7%, to $1.80 a share from $0.98 a year earlier, while cash flow per share rose 54.9%, to $3.33 from $2.15. Revenue rose 43.6%, to $5.6 billion from $3.9 billion, due to the expansion of its oil sands business. The two new oil sands joint ventures are making good progress. They have already exceeded EnCana’s original targets, thanks to expanding refinery margins, and accounted for 14% of its cash flow in the first half of 2007. Margins will probably fall back to normal levels in the second half of 2007, but the profit contribution from these joint ventures should continue to grow. Due to rising construction and labor costs, EnCana has scaled back its overall expansion and spending plans. However, that has freed up more cash for stock repurchases; it spent $1.8 billion on buybacks in the first half of 2007. The strong results should also let EnCana raise its $0.80 dividend, which yields 1.4%. The stock has moved down since it peaked at $67 in June. It now trades at 12.0 times EnCana’s projected 2007 profit of $4.90 a share. It’s also cheap at 5.7 times its forecast cash flow of $10.38 a share. EnCana is a buy.