Shares of Encana Corporation (TSX:ECA)(NYSE:ECA) have been on a downward trend for the greater part of the past five years.

That’s not an encouraging sign, but some contrarian type are looking at the brutal sell-off and wondering if the beleaguered company is finally poised for a rebound.

Let’s take a look at Encana to see if it deserves to be in your portfolio right now.


In late 2009, Encana decided to get out of the oil business and spun off its oil sands and refining assets into a new company that now trades as Cenovus.

At the time, natural gas prices were quite strong and the oil market was still feeling the negative effects of the financial crisis, so management felt comfortable betting on natural gas.

That wasn’t the best move for shareholders because the shale boom quickly drove gas prices to very low levels, and oil suddenly rallied on the back of unprecedented global stimulus action.

In 2013, Encana’s board brought in a new CEO, and the management team decided to reverse course. Again, the decision seemed reasonable given the fact that gas prices remained depressed and oil looked like it could be headed as high as $200 per barrel.

As you know, that didn’t happen.

Oil plummeted in the back half of 2014 just after Encana made two big oil-property purchases, both negotiated at what has turned out to be the top of the oil market.

The effects?

Encana’s shares traded for about $36 in early 2010. Today, they sell for less than $9.

Balance sheet woes

As a result of the big oil bets, Encana found itself carrying US$7.8 billion of debt at the end of last year. That’s a heavy load that threatened to crush the company.

In March, management did a good job of convincing the market to buy $1.44 billion in new stock, and then used the proceeds to redeem notes that were coming due in 2017 and 2018. At the end of Q2, the debt load still sat at US$5.2 billion, but things didn’t look as bad at that point because WTI oil had rallied back to $60 per barrel.

Since then, energy prices have fallen off a cliff again.

The company recently bought itself more time by selling its Louisiana-based natural gas assets for US$1.3 billion. The proceeds should help cover the current cash flow gap, but the situation still looks precarious for investors.

Cash flow issues

Encana says it will finish 2015 with cash flow of US$1.4-1.6 billion and capital expenditures of US$2-2.2 billion. That’s already an uncomfortable gap, but the year-to-date numbers and current market conditions suggest the end result could be worse.

In the first six months of the year the company brought in US$676 million, less than half the low end of guidance. Oil and gas prices have dropped significantly in the current quarter and the outlook for the rest of the year isn’t very good, so Encana could end up being a bit shy on the bottom end of its cash flow guidance.

As for the capital expenditures, the company spent just under US$1.5 billion in the first half of the year. That means things are going to be really tight if the company wants to stay within the spending target.

Could the stock rally?

If oil and natural gas prices suddenly reverse course in a big way, the stock could certainly catch a strong tailwind, especially given the size of the sell-off.

Encana also has an attractive portfolio of assets, and rumours of a possible buyout might push the stock to twice its current price.

Having said that, I think Encana is still a very risky bet and investors should at least wait for the Q3 numbers to come out before considering a move into the stock.

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