Encana Corporation (TSX:ECA)(NYSE:ECA) is trading near its 2016 highs, and investors want to know if the rally is sustainable or simply a head fake before another leg to the downside.

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


The Q1 2016 numbers were pretty ugly. Encana reported first-quarter cash flow of US$102 million, down US$393 million from the same period last year. The company struggled with lower realized energy prices in the quarter, but reduced output is also responsible for the bad numbers as the sale of assets during 2015 and a cut in capital expenditures hit production.

As a result, the company reported an operating loss of US$130 million during the quarter compared to a gain of US$19 million in Q1 2015.

Free cash flow was negative US$257 million for the first three months of the year. The company finished the quarter with cash and cash equivalents of US$222 million.

Fighting to survive

Encana is working hard to ensure it can ride out the downturn. The company reduced staff by an additional 13% in the first quarter and continues to focus more than 95% of its capital outlays on its four core assets located in the Permian, Duvernay, Eagle Ford, and Montney plays.

Encana spent US$359 million on capital projects in Q1, less than half of the amount reported in the same period last year. The capital program has been reduced to reflect the current environment, and Encana plans to spend less than US$1 billion in 2016.

Encana finished Q1 with long-term debt of US$5.4 billion. None of the debt is due before 2019, and Encana says it has the flexibility to refinance maturing debt from existing sources of liquidity.

Should you buy?

The Q1 numbers are scary, and investors who think oil is headed for another crash this summer should avoid the stock.

Having said that, the second-quarter results should be better given the recent improvement in oil prices, and Encana has the means to survive if oil stabilizes at current levels or moves higher through the end of the year. If you are an oil bull, the stock might be worth a shot.

Another reason to consider Encana is the potential for a takeover.

Encana holds an impressive portfolio of assets, and I wouldn’t be surprised if one of the larger players decided to take a run at the company while it is still reasonably cheap. The stock currently has a market cap of about US$6.6 billion. When you add in the long-term debt, you get a minimum price of about US$12 billion. That’s certainly doable for one of the industry heavyweights.

I wouldn’t back up the truck just in case WTI oil decides to head back to US$30 per barrel, but contrarian types might consider taking a small position on a pullback.

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