Encana Corporation (TSX:ECA)(NYSE:ECA) reported weaker-than-expected results for the second quarter as low oil prices and reduced natural gas production offset improvements in liquids output.

The stock dropped like a rock on the news and Encana is now down 37% since the start of the year and off 58% in the past 12 months.

Transition woes

Encana is moving away from its traditional focus on natural gas to one more heavily weighted to oil.

Last year the company made two major acquisitions in the oil space to gain a foothold in the promising Eagle Ford and Permian Basin plays.

Unfortunately, the deals were signed when oil prices still sat at nosebleed levels and the company is now saddled with a large debt position. The acquired assets are very promising but weakness in the oil market means revenues are not covering the company’s expenses or dividend payments.

Cash flow concerns

Encana generated Q2 cash flow of $181 million, down from $495 million in the first quarter.

Oil prices were stronger during the second quarter but the company’s realized price actually dropped from $46.17 per barrel to $43.78 per barrel. The natural gas results were even worse, with Q2 realized prices coming in at $3.52 per Mcf compared to $4.78 in the previous quarter.

Encana is sticking with its 2015 cash flow guidance of $1.4-1.6 billion and says it will cover capital expenditures and the dividend using cash flow and funds from divested assets.

Capex controls

In its June 2015 corporate presentation the company said it expects capital investments to be $2-2.2 billion this year. Encana spent $736 million in Q1 and analysts say the $743 million spent in Q2 was much higher than expected.

With $1.48 billion already allocated in the first six months, Encana will really have to tighten things up to stay within its guidance.

Debt load

Encana has net debt of $5.2 billion, of which no long-term obligations are due before 2019. This means the company still has some time to hope for a turnaround in oil prices before it has to raise equity again.

The company used the $1.44 billion it received in a March share offering to pay down debt that was due in 2017 and 2018.

Dividend safety

Encana has enough funds available through cash and credit lines to cover the distribution, but the weakening situation in the energy market suggests the dividend’s days could be numbered. At this point the company still says it is going to give shareholders some cash each quarter but investors should probably treat the payout as a bonus beyond 2015.

Takeover target

The latest rout in the stock price could start to attract suitors. At the time of writing Encana has a market cap of $8.5 billion. If you add in the debt you get a minimum price of just under $14 billion for the company. That’s an easy deal for any of the big players and Encana possesses an impressive portfolio of assets.

Should investors buy, sell, or hold?

Volatility is likely to continue in the energy space. The stock looks oversold at this point and current investors could see a nice rebound if oil prices start to firm up, but risks are still high.

New investors might want to wait for signs of a turnaround before taking a position in the stock.

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