Encana Corporation (TSX:ECA)(NYSE:ECA) once held the honour of being Canada’s most valuable stock and used to be called North America’s top independent oil and gas company.

Today, the former oil and gas giant is battling to survive the brutal rout in energy markets. Some pundits say more pain is on the way, while contrarian types are starting to kick the tires.

Let’s take a look at the current situation to see if Encana deserves to be in your portfolio.


Encana is in the process of transitioning from a focus on gas to being a prominent oil company.

Oil used to be a big part of the operation, but the company decided to spin off the oil-sands assets and created Cenovus Energy back in 2009 with the idea of being a play on natural gas.

Shortly afterwards, oil prices took off and natural gas prices hit the skids. The new management team decided to switch course again, and began shedding gas assets at the bottom of that market, while moving into oil properties at what turned out to be the top of the oil boom.

Those decisions have left the company with a serious debt load and a decimated stock price.

Debt and cash flow issues

The rout in oil prices came at the worst possible moment for Encana because it happened just as the company closed a big oil acquisition.

Encana finished 2014 with long-term debt of US$7.8 billion. The company raised about $1.44 billion in capital in March and used the money to pay down the obligations that were coming due in 2017 and 2018.

At the end of Q2, the debt load sat at $5.2 billion.

The company is sticking with its 2015 cash flow guidance of US$1.4-1.6 billion. Cash flow in Q2 was US$181 million. The company spent US$743 million on capital expenditures and another US$37 million on dividends.

Capital expenditures for the year are expected to be US$2-2.2 billion, but the company already spent $1.48 billion in the first half of the year, so analysts are concerned the guidance is a bit on the light side.

WTI oil prices are now below $45 per barrel, and market watchers are not calling for a relief rally to occur anytime soon.

Takeover possibility

At this point the stock looks like a great takeover candidate. Encana owns a portfolio of fantastic assets that will be very attractive when energy prices rebound.

At the time of writing, the stock has a market capitalization of US$6.2 billion. When you add in the debt you get an enterprise value of just US$11.4 billion. That’s an easy deal for any of the big players.

Should you buy Encana?

The stock is a risky bet. With oil prices stuck below $50 and the debt load being so high Encana might have to cancel the dividend and raise capital again to shore up the balance sheet.

A buyout could certainly occur, but the vultures are likely to wait for the situation to deteriorate even more before they move in. At this point I would still avoid the stock.

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