Encana Corporation: Is the Run Over?

Without higher oil prices, Encana Corporation (TSX:ECA)(NYSE:ECA) should drift lower.

The Motley Fool

With oil and gas assets across the Montney, Duvernay, Eagle Ford and the Permian Basin, Encana Corporation (TSX:ECA)(NYSE:ECA) saw its stock price fall significantly along with nearly every other energy producer. From a high of $26 in 2014, shares fell as far as $4.14 this year. Since February, however, shares have nearly doubled to $8, buoyed by higher oil prices.

Now that oil is drifting lower again, is the rally done for Encana?

A proxy for oil

It shouldn’t be surprising that Encana’s share price is heavily influenced by price swings in oil. Over the past 12 months, the relationship between oil prices and Encana’s stock is fairly strong. The recent rally has been fueled by oil popping to $40 a barrel.

If oil continues rising, the company could be in an enviable position. Its four primary assets are projected to have 30% returns at $50 oil and $3 natural gas. Boosting production adds leverage to higher oil prices. Oil and liquid production increased 36% in the final quarter of last year. Higher oil prices will continue resulting in a higher share price.

oil encana

What if conditions deteriorate?

While Encana needs higher oil prices to survive over the long term, management has positioned the business well to survive another oil rout. Last year the company generated $400 million in capital and operating efficiencies, beyond the initial target of $375 million. Cost savings helped Encana reduce debt by roughly 30%, or $2 billion. Management believes it can achieve another $550 million in savings this year.

With no long-term debt maturities until 2019, a renewed $4.5 billion line of credit, and permanent cost savings taking hold, the company should have no issues surviving another dip in energy prices. The rally would almost surely be over but, long term, patient shareholders can still benefit.

$50 oil this year?

With the capital and financing in place to survive a continued multi-year downturn, Encana shareholders simply need oil to rebound over the long term. At $50, most of its major projects would still generate attractive returns.

Many still contest that Encana is a natural gas company (75% of production), but oil will be the major driver of future profits. In just three years it’s grown from 5% of production to nearly 20%, all with higher profit margins. As it strengthens its focus on just four core properties, oil production should continue to grow its share. Fortunately, the oil markets are starting to rebalance.

Kuwait, which exports about 2.1 million barrels per day, expects the price of crude oil to rise to $50 per barrel by the end of 2016, citing “increased demand and shrinking supply” as the reason for the expected rise. Right now, global oil production is about two million barrels per day above consumption.

By 2017, the EIA expects this gap to close and be completely eliminated by the end of the year. The last time the market was completely balanced, oil was at $100 a barrel. Long-term investors should be set holding Encana shares.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

energy industry
Energy Stocks

2 TSX Energy Stocks to Buy Hand Over Fist Now

These two rallying TSX energy stocks can continue delivering robust returns to investors in the long term.

Read more »

green energy
Energy Stocks

1 Magnificent TSX Dividend Stock Down 37% to Buy and Hold Forever

This dividend stock has fallen significantly from poor results, but zoom in and there are some major improvements happening.

Read more »

oil tank at night
Energy Stocks

3 Energy Stocks Already Worth Your While

Here's why blue-chip TSX energy stocks such as Enbridge should be part of your equity portfolio in 2024.

Read more »

Solar panels and windmills
Energy Stocks

1 Beaten-Down Stock That Could Be the Best Bet in the TSX

This renewable energy stock could be one of the best buys you make this year, as the company starts to…

Read more »

Dice engraved with the words buy and sell
Energy Stocks

Is Enbridge Stock a Buy, Sell, or Hold?

Here's why Enbridge (TSX:ENB) remains a top dividend stock long-term investors may want to consider, despite current risks.

Read more »

Gas pipelines
Energy Stocks

If You Had Invested $5,000 in Enbridge Stock in 2018, This Is How Much You Would Have Today

Enbridge's high dividend yield hasn't made up for its dismal total returns.

Read more »

Bad apple with good apples
Energy Stocks

Avoid at All Costs: This Stock Is Portfolio Poison

A mid-cap stock commits to return more to shareholders, but some investors remember the suspension of dividends a few years…

Read more »