Encana Corporation (TSX:ECA)(NYSE:ECA) has been on the acquisition trail for the past couple of years, but the untimely rout in the oil sector has beaten the stock down so much that it could be a target itself.

Transition troubles

Encana is in the process of switching from being a natural gas company to a key player in the oil sector. Unfortunately, the timing of the move has proven to be a bit of a disaster for shareholders.

When the idea was first hatched, the market responded well and everyone was on board. Oil prices still sat above $100 per barrel and the beaten-up natural gas market looked like it was going nowhere soon.

Encana sold off a number of gas assets at the bottom of the market and began buying oil properties at what turned out to be very high prices. Of course, nobody expected oil prices to fall off a cliff, but the events over the last 12 months make some of the decisions look pretty bad.

The largest deal, and the one that put the balance sheet on thin ice, was the $7.1 billion purchase of Athlon Energy. The acquisition gave Encana prime assets in the Permian play in Texas, but it closed right in the middle of the worst days of the oil rout.

Investors have paid the price, with the stock losing more than 40% of its value since last summer.

Turning the corner

Management has remained focused on the plan and is doing a good job despite the brutal conditions in the market. In fact, Encana’s liquids production rose 13% in the first quarter, driving cash flow 31% higher when compared with Q1 2014.

Encana now has world-class assets located in four of the industry’s top liquids plays: Montney, Duvernay, Eagle Ford, and Permian. These four locations are delivering better margins than the company saw before it began the transition process in 2013.

What about cash flow?

The good news runs into a bit of a wall once we look at the cash flow situation. Encana’s guidance for 2015 is based on an average WTI price of $50 per barrel and an Average NYMEX natural gas price of $3 per million British thermal units (MMBtu).

Oil traded significantly higher than the target price during Q2, but natural gas has lingered below the projected mark.

Cash flow guidance for the year is about $1.6 billion, but capital expenditures are going to be at least $2 billion. The company also pays out about $52 million in dividends each quarter.

Can Encana cover the gap?

The company finished Q1 with cash and cash equivalents of about $2 billion, and had $2.6 billion in available credit lines, so there is no short-term threat of a cash crunch.

Encana ended Q1 with $5.9 billion in long-term debt. The company stabilized the balance sheet with a $1.44 billion share offering in March, and used the proceeds to pay down some of its obligations, but the debt level is still pretty high.

The company says a $10 increase in the price of oil adds about $55 million to quarterly cash flow. Based on 2015 guidance, oil prices will have to improve significantly to cover the capex shortfall and the dividend.

Is Encana a takeover target?

The company has a market cap of just under $12 billion. If you add in the debt you get a minimum takeover price of $18 billion. This is an easy deal to do for any of the big boys.

Encana owns a fantastic portfolio of assets. If oil prices plunge again and stay there for an extended period of time, Encana could see its situation deteriorate quickly and the vultures would certainly start to circle the prize.

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Fool contributor Andrew Walker has no position in any stocks mentioned.