The Motley Fool Canada

Helping the word invest…better.

4 Reasons Why the Market is Wrong About Encana

Yesterday, Encana (TSX: ECA, NYSE:ECA) released its long awaited strategy, and the reception was cold.  The stock was down over 5% as investors focused on the production shortfall for this year and the $65 million restructuring charge.  I think the move down has created a good buying opportunity.  Here’s why:

1)      More Focused Capital Spending is Good

Going forward, 75% of capital spending will be concentrated on 5 core growth assets: the Tuscaloosa Marine Shale in southeastern U.S., the DJ Basin in Colorado, the San Juan basin in New Mexico, and the Montney and Duvernay in Western Canada.  Encana is targeting a 10% CAGR in production through 2017.  By 2017, 75% of the company’s cash flow will be from higher-value natural gas liquids.

2)      Focus on Cost Reductions and Efficiencies over Production Growth

Encana expects a 10% increase in netbacks in 2014 due to cost reduction and capital efficiencies.  As an investor, I like to hear that Encana is targeting more profitable production.  Management is focusing on growing value rather than production.

The company is planning a 10% reduction in capital spending in 2014 but production will be flat compared to 2013.

3)      Strategy Does not Include Asset Sales

Encana will still be holding on to its enviable land position and decades of drilling inventory

4)      Natural Gas Optionality

I like that Encana will still have big exposure to natural gas so the company will be in a position to take advantage of a future rise in natural gas prices.  These gas assets are quite profitable and competitive in the right natural gas price environment.

Bottom Line

Rather than focus on the short term issues that Encana is going through, with the restructuring and new strategy, investors should focus on the longer term outlook.  So while production has hit a short-term bump in the road as 2014 cash flow is forecast to be unchanged versus 2013, I view this as an opportunity if we keep our eyes on the longer term.

EnCana isn't the only player in the energy sector that's poised to rebound.  Check out our special FREE report "Fuel Your Portfolio With This Energetic Commodity" and learn all about how to play an alternative energy source that's set to become the fuel of the next century! Click here now to get the full story!

FREE! 1 Top Canadian Stock for 2014 and Beyond

Constructing a portfolio is like building a house, chief analyst Iain Butler says. You want to build it on a foundation of "rock solid, proven, long-term money makers." And do we have a winner for you... Click here now for our FREE report and discover 1 top Canadian stock for 2014 and beyond!

By submitting your email address, you consent to us keeping you informed about updates to our website and about other products and services that we think might interest you. You can unsubscribe at any time. Please read our Privacy Statement and Terms of Service.

A MOTLEY FOOL SPECIAL REPORT

A True Buy-and-Forget Stock

Fool contributor Karen Thomas owns shares of EnCana. The Motley Fool does not own shares of any of the companies mentioned.

See all posts by Karen Thomas
The Motley Fool