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

Bank sign on traditional europe building facade
Bank Stocks

Are Canadian Bank Stocks Still Undervalued?

Bank stock are moving higher. Is it time to buy or wait?

Read more »

You Should Know This
Stocks for Beginners

5 Things to Know About Cargojet Stock in November 2022

Cargojet (TSX:CJT) stock should continue to see massive growth in the near and long term, thanks to long-term agreements and…

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

Better Buy: BCE Stock or Enbridge?

BCE and Enbridge pay growing dividends with high yields. Is one more attractive today?

Read more »


TFSA: 3 TSX Stocks to Buy With the New $6,500 Room Limit

Canadians who are eager to utilize the new $6,500 room limit in 2023 should look to TSX stocks like Aritzia…

Read more »

Financial technology concept.

The Smartest Stocks to Buy With $20 Right Now and Hold Forever

Given the favourable market conditions and their growth initiatives, these three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

2 Unstoppable Dividend Stocks to Load Up in Your TFSA

These two dividend stocks provide long-term passive income that comes out every month, thanks to lease agreements lasting over a…

Read more »

Doctor talking to a patient in the corridor of a hospital.
Tech Stocks

3 Healthcare Stocks to Buy for Long-Term Passive Income

Healthcare stocks provide exposure to an essential service sector. They are also the best for passive income in the short…

Read more »

potted green plant grows up in arrow shape

4 TSX Growth Stocks to Buy and Hold Forever

Here's why TSX growth stocks, and these four stocks specifically, are some of the best investments you can buy in…

Read more »