EnCana (TSX:ECA,NYSE:ECA) will release 4th quarter and year-end 2012 results on Thursday, February 14th. Several recent developments indicate a less than happy Valentine ’s Day might be in store for this natural gas giant.
The CEO unexpectedly resigned
Rarely is this a positive sign. CEO Randy Eresman announced his resignation from the company on January 11, 2013 but will stay on as an advisor until the end of this month. Eresman had been with the company for 35 years and played a critical role in splitting EnCana into two separate companies – natural gas focused EnCana (at least it was in the beginning), and oil focused Cenovus Energy. One of the reasons cited for Eresman stepping aside was exhaustion.
EnCana is shrinking
Another troubling sign. Natural gas has been in a well-documented slump, and probably a big reason for Eresman’s exhaustion. When the new EnCana began trading on December 4, 2009, natural gas closed at $4.46/mmBtu. Natural gas currently trades at $3.23 and since the split occurred, the commodity has spent time below the $2 mark.
This has left EnCana with gas plays that are worth far less than originally estimated and short of funds to develop them as they had intended. EnCana has relied on joint ventures and asset sales to move forward. Because of this, although still sizeable, EnCana’s collection of assets is shrinking. According to Capital IQ, the company closed 2011 with total assets of $34 billion. At last report, total assets were about $19 billion. Book value per share declined from $22.17 per share at the end of 2011 to just $7.50 at the end of Q3 2012. Eresman had intended to leverage the company’s significant land holdings into a growing, cash flow generating beast. Instead, his tenure with the new EnCana has been more like a slash and burn exercise for survival.
The final sticking point is EnCana’s hedge book – something that propped the company up when natural gas swooned through 2012. At the end of the first quarter in 2012, EnCana had 65% of its 2012 expected production hedged at $5.80/mmBtu. On March 30, 2012 the natural gas price settled at $2.13. A nice buffer to say the least.
At the end of Q3 2012, EnCana only had 39% of expected 2013 production hedged at $4.51. Again, the gas price currently sits at $3.23. Not the same buffer. This dynamic means operating cash flow is unlikely to cover the company’s 2013 dividend and could bring a cut into play. Short term, the company has cash on hand and room on its balance sheet to support the current payout. Longer term, this is not sustainable.
The Foolish Bottom Line
The message here is that EnCana is beginning to resemble a shadow of its former self. The depressed commodity is acting like a cancer, completely altering what this company was supposed to become. Though exhaustion was cited, Eresman could very well have looked out over the next 3-5 years and realized there is no obvious relief from the current natural gas environment – a battle he no longer wants to fight.
To be an EnCana shareholder, you need to have a very strong conviction that the natural gas price is going to make a comeback in the next year or two. If you don’t have this conviction, there are better places for your investment dollars.
Fool contributor Iain Butler is short April 2013 EnCana put options with a strike price of $18. The Motley Fool has no positions in the stocks mentioned above.
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