Analysis: Encana Corporation (ECA)
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash
Encana is an oil and gas, exploration and production (E&P) company with a focus primarily on natural gas and natural gas liquids. This blog entry will talk about my ownership of this stock and my projections for its future as it pertains to both the company itself as well as the ownership of it in my portfolio. As of this writing, it is 10.09% of my entire portfolio.
2013 was not a good year for Encana. Personally speaking, I think I'm being exceptionally gracious with that description, too. The company, as a whole, has been gong through a number of challenges. First, they had to find a new CEO, to which Doug Suttles was named in June. Doug comes from a long history in the Oil and Gas industry with prior employment with both Exxon and BP. Just before coming to coming to Encana, Doug led BP's reaction to the Deepwater Horizon oil spill that occurrend in the Gulf of Mexico waters in 2006. Based upon his history, I get a sense that Doug is a man of quick action and it should be interesting to see where he takes things. More on that later. Additional challenges Encana was facing as Doug took the helm was depressed natural gas prices due to the NA glut of natural gas as well as the results that has to the business - lower margins, hemorrhaging free cash flow and cost structures, and an inability to adjust to these new markets. All of this led to an overall performance in the stock of -8.65% when the S&P returned 29.69% and the Oil and Gas exploration sector returned 30.21% (based off of the XOP). This is beyond abysmal performance in comparison to its peers and clearly house cleaning has been needed and clean house Doug has begun to do. On November 5, Doug and his team presented their strategic vision for the next 4 years. In it included job cuts, a slashing of the dividend, reduced capital expenditures for 2014, and a very hard-pressed focus on growing the natural gas liquids portion of their business while just keeping the lights on for nat gas. Doug has only been in the office for 6 months and we won't see how these plans have progressed or what results we might begin to see until the 4th quarter and year-end conference call on February 13. All these things considered, Encana did beat analyst estimates all 3 quarters so far this year, but just beating on earnings hasn't been enough as production has continued to decelerate.
Given the performance of the stock and Mr. Suttle's efforts to quickly turn the company around to be higher performing, 2014 has some potential for Encana stock holders. That being said, that is not to say I expect a dividend increase anytime soon. The payout is fairly in well in line with other E&P companies now and they just slashed it, so I expect it'll be years before we start to see increases unless this stock (and the company's top and bottom lines) start to explode. Considering the strategic direction was just announced and it won't be until June before the CEO has been with the company for a full year, I expect that Encana is likely to be a second half of the year story, if it becomes a story at all. Focusing on high-margin products, cutting costs, being more efficient and all that is great to strive for, but the balance sheet will need to show results. I think Doug is capable of this, but he still needs time. Currently, there has been a natural gas price tailwind also helping the company out, near-term. Prices are over $4 for nat gas and with as cold this winter has been (I ought to know, I'm in Minnesota), the weather is likely fueling increased prices in the futures markets fearing supply will be shrinking. With the glut of natural gas this country has, I'm really not banking on the fact that supply is a big problem, though, producers aren't pumping out nat gas as quickly as they once were, so this may help the price stabilize around $4 as we get into the summer. The next real catalyst for this company is going to be the February 13 fourth quarter and year-end conference call. Between now and then, the stock will be subject to the natural gas prices and the overall market, which might take a breather as we get into next week and mid-January from such a bullish 2013.
My Stock Ownership Plans
This stock clearly was the biggest dog in my portfolio. It was the only stock I owned which lost me money last year. I currently have this stock ranked as a 3, but it could very easily turn into a 4 if market conditions turn. I am looking to cut at least a portion of my position here just because I currently don't see a lot of potential. However, I have to be careful of a few things - 1) the conference call in February could change everything. That call has the potential to put a bottom in the stock. 2) Every dog has its day. After such an atrocious year, heck, even 3 years, we very well could be reaching a turning point. While I do believe there are other stocks in this sector currently performing better and likely to continue performing better early in the year, if this company does turn things around quickly, there might be room for upside. I'm anticipating $0.99 earnings on the year which puts the company at a PE ratio just over 18. Compared to peers, this is still kind of high. However, if we see signs of Free Cash Flow (FCF) starting to expand, this could make the company's future profits expand and the stock price will rise. At this stage, though, I'm wondering if by the end of 2014 this company will see a $20 stock price yet. With that kind of uncertainty, and frankly, doubt, I feel less and less that now is the time to own the stock and will be letting it go before summer of 2014.