Encana Corporation (TSX:ECA)(NYSE:ECA) once held the distinction of being Canada’s most valuable company.

Those days are long gone, and many pundits are wondering if the company will even survive, but contrarian types are looking at the recent sell-off and wondering if this might finally be the moment to position for a rebound.

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

Transition process

Encana is in the process of transitioning from being a natural gas company to one primarily focused on the production of oil.

The decision was made when gas prices were in the dumps and oil still traded at nosebleed levels. Unfortunately, the company unloaded gas assets at the bottom of the market and purchased oil properties at the highs.

Those decisions saddled the company with a large debt position and hammered shareholders in the process as oil plummeted.

Balance sheet issues

Encana started 2015 with long-term debt of US$7.8 billion. In March the company raised $1.44 billion in capital and used the proceeds to pay down debt that was coming due in 2017 and 2018. That was a prudent move and bought the company some important time to help it ride out the downturn in the market.

During the second quarter things started to look better as WTI oil prices rallied back above $60 per share. Encana finished Q2 with $5.2 billion in outstanding debt and further increases in oil prices would have meant the company could battle its way through.

Cash flow concerns

In the Q2 earnings report Encana said it is maintaining its 2015 cash flow guidance of US$1.4-1.6 billion.

Cash flow for Q1 was US$495 million and Q2 came in at US$181 million. Oil prices are a lot lower now than they were in the first half of the year, which suggests the guidance could be a bit ambitious.

The company’s 2015 capital program is expected to be US$2-2.2 billion. Encana spent US$1.48 billion in the first half of the year, so pundits are thinking the projected capex could be a tad light.

The size of the cash flow gap should be a warning signal for potential new investors.

Positive signs

Encana just announced a US$1.3 billion deal to unload its natural gas properties in Louisiana. The move will bring in a much-needed US$850 million in cash and reduce commitments by US$480 million.

The news lit a spark under the stock, driving the shares up nearly 10%. The deal should ensure the company won’t have to go back to capital markets in the short term, but it still doesn’t solve the cash flow problem.

As long as WTI oil prices remain near $40 per barrel, Encana is going to be cash flow negative, and that means the stock is at risk of continuing its brutal slide.

Should you buy Encana?

Dividends in the patch are falling like dominoes and it would be reasonable to assume that Encana’s payout will suffer the same fate. At this point, the company still has a sizeable debt position, and oil prices are showing no signs of a meaningful rebound.

Given the attractiveness of its asset portfolio, the company could find itself the target of a takeover bid by one of the industry’s larger players. Nonetheless, I would still avoid the stock.

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