It’s been a very good year for shareholders of energy producer EnCana Corporation (TSX: ECA)(NYSE: ECA), with the shares returning close to 40%. Over this time, the company has made some significant strides.
It has shifted from natural gas production to oil, thanks to various asset sales and purchases. It also sold its power division. And it even spun out its royalties into a new publicly traded entity, PrairieSky Royalty Ltd.
CEO Doug Suttles has said that the company is one to two years ahead of schedule in its turnaround plan, and also said he’s very excited for the rest of 2014. So is now the time to jump on board? Well, not necessarily. Below are two reasons to avoid the shares, and one company to buy instead.
Reasons to avoid EnCana
1. Still some similarities with the old EnCana
Looking back at the old EnCana, what exactly got the company into trouble? Most people would tell you that it was the slump in natural gas prices.
And while that is mostly true, there was another, more general reason: a strategy based on the latest trends. For example, it expanded in natural gas when everyone was doing the same. Then, when it ran into trouble, it sold gas assets when everyone was doing the same. And now, it is buying oil assets, again just like its peers. There are plenty of companies that operate this way, but it’s a very expensive strategy. And time has shown that this is a difficult habit to break.
Wayne Gretzky was a great hockey player because he always skated to where the puck was going, rather than where the puck already was. EnCana has still not shown it can do the same.
2. Full price?
At this time last year, it seemed that nobody wanted a piece of EnCana. And in retrospect, it proved to be the perfect time to buy.
Now, with the turnaround in full swing, the company is much more popular, as evidenced by its surging share price. Even in May, when the company spent $3.1 billion on Eagle Ford oil assets in Texas, the shares jumped 4.6% on the news. Based on the company’s past misadventures, it was remarkable to see investors react so positively to such a big purchase.
So at this point, Encana may just be a missed opportunity.
One company to buy instead: Canadian Natural Resources Limited
Shareholders of Canadian Natural Resources Limited (TSX: CNQ)(NYSE: CNQ) have also done remarkably well over the past year, with the shares returning 46%. But there are a couple of differences between CNRL and EnCana.
Most importantly, CNRL has a far better long-term track record. Over many years, the company has built a reputation for disciplined cost control and fantastic capital allocation. More specifically, CNRL has consistently bet against the cycle — an example occurred earlier this year, when it bought $3.1 billion worth of gas assets in Canada, right when companies like EnCana were selling.
So if you’re a long-term investor, you should go for companies that have proven themselves over the long haul. And in Canada’s energy sector, CNRL may be your best option.