2 Reasons to Avoid EnCana Corporation, and 1 Stock to Buy Instead

EnCana Corporation (TSX:ECA)(NYSE:ECA) has had a fantastic year, but you should be careful before jumping on board.

| More on:

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.

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 Benjamin Sinclair has no position in any stocks mentioned.

More on Investing

question marks written reminders tickets
Tech Stocks

Nvidia’s Historic Stock Split: Will Investors See Bigger Gains?

Nvidia's (NASDAQ:NVDA) record 10:1 stock split entices many investors in several important ways. But some myths aren't technically correct.

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog

Retirees: 2 TSX Dividend Stocks That Have Raised Payouts Annually for Decades

These stocks offer high yields and should continue to raise their payouts.

Read more »

TFSA and coins

5 Canadian Stocks With a Real Chance of Tripling Your TFSA’s Value

TFSA balances can triple in value with five Canadian stocks that have delivered outsized gains in recent years.

Read more »

A worker drinks out of a mug in an office.
Tech Stocks

Want $1 Million in Retirement? 3 Stocks to Buy Now and Hold for Decades

Growth stocks such as Docebo and Celsius Holdings should help you generate outsized gains in the upcoming decade.

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

This 8% Dividend Stock Pays Cash Every Month

Earn monthly cash of $154 with this 8% dividend stock.

Read more »

A miner down a mine shaft
Metals and Mining Stocks

Should Investors Buy the Correction in Lundin Mining Stock?

Lundin (TSX:LUN) stock has fallen by 10% in the last few weeks, but so has the price of copper. Coincidence?…

Read more »

Metals and Mining Stocks

Best Stocks to Buy in May 2024: TSX Materials Sector

A TSX materials sector ETF could help investors gain cheap diversified exposure to the hot sector's stocks – so will…

Read more »

man is enthralled with a movie in a theater

Should You Buy Cineplex While it’s Below $9?

With analysts expecting a significant recovery in the second half of 2024, is this the last chance to buy Cineplex…

Read more »