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Encana: Be Greedy When Others are Fearful

My absolute favourite quote when it comes to investing comes from Warren Buffet:  “Be Greedy when others are fearful”.  While listening to Encana’s (TSX:ECA,NYSE:ECA) conference call yesterday afternoon this quote came to mind.  There was disappointment in the air.  Analysts and investors had been hoping to learn more about the company’s new, elusive strategy.

We also saw the disappointment in the market, with the stock closing down 1.93% for the day.  Investors are unsure and afraid.

Management was not forthcoming about the new strategy that’s being worked on.   However, the new CEO Doug Suttles did say that he is focused on coming up with a strategy that “will deliver sustainable growth in shareholder value during a period of modest commodity prices”.  This, I like.  Furthermore, Doug Suttles has a good track record from his days at BP so he has credibility.

No strategy but….

Yesterday’s results did provide proof that the company can successfully participate in the natural gas liquids (NGL) market, which has been more profitable recently than the natural gas business.  The highlight of the quarter was that oil and liquids production increased 69%, with NGLs being the biggest driver of this increase.

Natural gas production, on the other hand, was down 1.3% compared to the second quarter of 2012.  Through its liquids production, Encana has been able to soften the blow of weak natural gas prices – an obvious positive.

Liquids business

NGLs have become very valuable by-products of natural gas processing.    The components within the NGL stream are: propane, butane, ethane, isobutane, and pentane.   They have a variety of different uses, such as enhancing oil recovery in oil wells, providing raw materials for oil refineries or petrochemical plants and as sources of energy.  In addition, NGLs act as inputs for end-products in a wide variety of industries that have a wide variety of uses.    

What’s next

While we patiently wait for the official announcement of Encana’s new strategy, there are good reasons to be greedy, not fearful, and hold on to this stock.  Cost savings initiatives are coming through, with $100-$150mln in cost savings expected in the second half of this year.  In addition, the balance sheet is solid with $2.9bln in cash and cash equivalents and there are still decade’s worth of energy related inventory in the ground.

I think that Encana will emerge from its review as a more diversified and more efficient company, which is always a good thing.  In my view, the risk/reward profile of this stock is still very attractive.

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Fool contributor Karen Thomas owns shares of Encana.  The Motley Fool does not own shares in any of the companies mentioned. 

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