What’s Next for Encana?

Encana shares have been weak for a long time. Is the recent uptick an indication the company has turned the corner?

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On Monday morning, Encana (TSX: ECA)(NYSE: ECA) finally made it official, selling its natural gas properties in the Jonah field to private equity group TPG Capital for $1.8 billion. The sale of the Wyoming assets has been rumored for weeks now, as Encana continues to sell non-core operations.

The properties were producing about 323 million cubic feet of natural gas per year, about 12% of Encana’s total production. Shares in the company were slightly down on the news, as some analysts said the price tag was below their expectations.

Analysts don’t think Encana is finished selling assets. They are speculating that the company will sell its Bighorn assets next, located in Alberta. The property consists of more than 480,000 acres, producing the equivalent of 61,000 barrels of oil per day; 79% of production from Bighorn is natural gas.

Bighorn is a slightly larger field than Jonah, and estimates reach as high as $2 billion in sale proceeds for Encana if the properties in Bighorn are sold separately. The sale of both these assets represents a huge cash boost for the struggling natural gas producer.

Why exactly is Encana looking to unload so many assets?

The company has indicated that it wants to focus on five main areas — located in Alberta, British Colombia, and Colorado — where it thinks prospects look brightest. When current CEO Doug Suttles took over in 2013, part of his original turnaround plan was to sell assets not considered core, including Jonah and Bighorn. Streamlining operations should eventually lead to higher profits.

The company has plans for the cash as well. The current debt load is more than $7 billion, and is one of the reasons why the quarterly dividend was cut from 20 cents per share to 7 cents. Encana plans on using some of the proceeds from Jonah to prepay some of its debt, and would also do so with proceeds from a Bighorn sale.

Also expect the company to use some of its newly acquired capital to buy back shares and to do a few transactions that add onto the main core areas.

What’s next?

Encana has struggled as natural gas prices declined, sending the stock down more than 50% over the last five years. Like many other energy companies, Encana was simply too aggressive during good times, and is now paying for it during bad times.

The company is doing the right things by selling assets, cutting costs, and focusing on its most productive assets. But ultimately, it is dependent on two things outside of its control — the price of natural gas and the Canadian dollar. Both of these factors have moved in the company’s favor over the past few months, which is reflected in the recent uptick in the share price.

Longer term, the future for natural gas looks bright. Natural gas-powered vehicles and power plants are beginning to become commonplace. Canada is beginning to build the infrastructure needed to export natural gas in a meaningful way. Natural gas is a cleaner burning fuel with ample reserves, making it an ideal choice for all sorts of applications. The market is there, it’s just going to take a while to develop.

Supply will continue to be an issue, as North America is still awash in natural gas. This supply issue affected Pengrowth Energy (TSX: PGF)(NYSE: PGH) much the same as Encana, leading to weakness in its share price and a similar dividend cut. As more companies like Pengrowth switch focus from natural gas to oil, this should help the supply issue, but Encana investors have to be patient.

Foolish bottom line

Encana investors should be happy with this asset sale, since it’ll help shore up the balance sheet. The company is making the right moves going forward, and should be nicely positioned when natural gas prices finally recover in a meaningful way. Investors just shouldn’t expect a return to previous highs anytime soon.

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 Nelson Smith has no position in any stock mentioned in this article.

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