ENCANA CORP. $20.61 (Toronto symbol ECA; Shares outstanding: 735.4 million; Market cap: $15.2 billion; TSINetwork Rating: Average; Dividend yield: 4.3%; www.encana.com) expects to earn $1.02 a share this year. However, cash flow could be as high as $4.58 a share.
Encana’s forecast 2012 cash flow is so much higher than earnings because it includes not only earnings, but also non-cash charges including depletion of its natural gas assets.
In Encana’s case, those depletion charges include writing off natural gas assets acquired at much higher prices.
Natural gas is now trading at just over $2 U.S. per million British thermal units (BTUs). In early 2006, prices were as high as $15 per BTU.
However, Encana’s reserves are long-lived and highly productive. That’s in large part because the company was a pioneer, not only in buying top-quality properties, but also in the horizontal drilling techniques necessary to extract gas from shale.
Encana can now use its strong cash flow, and its $2.4-billion cash holding, to replace its higher-cost reserves at much lower prices.
The company’s shares trade at a high 20.2 times this year’s forecast earnings. But the stock trades at just 4.5 times forecast cash flow per share.
That’s cheap, especially for a leading producer like Encana.
Encana is a buy.
