ENCANA CORP. $70 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 750.2 million; Market cap: $52.5 billion; WSSF Rating: Average) is a major North American producer of natural gas (about 80% of total production) and oil (20%).
EnCana prefers to focus on what it calls “key resource plays”, including early-stage natural gas fields and oil sands projects. These assets cost more to develop, at least initially, but can last decades longer than conventional properties.
The stock rose to a new peak $99 in May, 2008, partly due to EnCana’s plan to split itself up into two companies — one focusing on natural gas, the other on oil sands and oil refineries. Stockholders will receive one new common share in each new company for every EnCana share they hold. EnCana aims to complete the plan early next year.
Break-ups like this generally work out well for investors, as the total value of the two new stocks usually exceeds the value of the parent over time.
Meanwhile, EnCana earned $1.96 a share (total $1.5 billion) in the second quarter of 2008, up 9.5% from $1.79 a share ($1.4 billion) a year earlier. These figures exclude unusual items. Cash flow per share grew 15.6%, to $3.85 from $3.33. Revenue rose 30.4%, to $7.3 billion from $5.6 billion.
EnCana continues to expand its unconventional holdings. It recently paid $457 million for the rights to 89,500 acres in Louisiana. It now holds 325,000 acres in the region, which contain sizable deposits of shale gas. Unlike regular natural gas, shale gas is harder to extract. However, new drilling techniques are helping lower the costs of shale gas projects.
EnCana now trades at just 10.5 times its projected 2008 earnings of $6.64 a share, and at 5.6 times its cash flow of $12.45 a share. The $1.60 dividend yields 2.3%.
EnCana is a buy.
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