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Encana Corp.: Buy the Dip?

Encana Corp. (TSX:ECA)(NYSE:ECA) has been an abysmal stock to own since the Financial Crisis, and contrarian investors looking to find a bottom have gotten crushed. The stock had sharp declines followed by long periods when it remained flat.

More recently, the stock has started to rally upwards; it soared over 100% last year, but the stock has since pulled back over the past few months, and last year’s gains are starting to slip. Is the stock heading back to 52-week lows? Or is the dip nothing more than a buying opportunity for contrarian investors looking to double up on the next upward run?

Encana has been investing in initiatives to reduce costs, and it’s been selling non-core assets to reduce its capital expenditures. There’s no question that these initiatives will help the company if oil prices remain lower for longer, but it’s a process that’s going to take time. You shouldn’t think Encana is immune to further drops in oil prices just because the stock is ridiculously cheap. The fact of the matter is, there’s still plenty of downside for the company, especially if oil prices start slipping again.

The company expects to increase its production by approximately 60% between 2016 and 2021, so there’s a lot of upside for the company, especially if oil prices head higher over the next few years. The management team also expects its cash flow to soar about 300% with its margins doubling over the next five years. These are reasons to be optimistic as a shareholder, especially if you’re bullish on oil.

If oil prices climb higher over the next five years, Encana will be a winner, and you’ll be rewarded with huge dividend increases to go with capital gains thanks to a surge in free cash flow. The company pays a minuscule 0.6% dividend yield now, but this could grow by leaps and bounds over the next few years if all things go to plan.

The stock currently trades at a 1.7 price-to-book multiple, which is lower than the company’s five-year historical average multiple of 1.9. The stock is ridiculously cheap, but it has been cheap for quite a long time. Many investors may think of Encana as a value trap, but I think there’s serious upside over the next few years if you’re able to stomach some short-term volatility.

This investment isn’t without its risks, though. If oil prices crash again, we could see things get real ugly, and there could be a lot of downside from current levels. CEO and chairman Douglas Suttles recently bought more shares of Encana on the recent dip with an average price of around $14.20. This is an encouraging sign, and it leads me to believe the current dip is a buying opportunity. I would buy small chunks on the way down because it’s very likely that the stock will continue to drop in the short term.

Stay smart. Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any stocks mentioned.

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