Encana Corporation (TSX:ECA)(NYSE:ECA) is down more than 60% in the past five years, but a bounce off the recent lows has investors wondering if the stock has finally bottomed.
Let’s see if this is the right moment to get back into Encana.
Troubled transitions
Encana once held the distinction of being Canada’s largest company with an industry-leading portfolio of oil sands, refining, and natural gas assets.
As the financial crisis unfolded, Encana decided to spin off the oil sands and midstream assets into a new company that became Cenovus Energy.
Oil prices were in the dumps at that time, and natural gas looked like the better way for the company to go. As it turns out, that wasn’t a great decision.
The boom in shale gas subsequently drove natural gas prices to multi-year lows, and oil rallied on the back of unprecedented global stimulus.
As frustrated shareholders watched the two commodities go in opposite directions, the board finally decided to bring in a new CEO and change directions once again.
In 2013, Encana began the process of dumping its gas assets and buying oil plays in the areas that looked the most promising.
At the time, the move seemed to make sense. Oil traded above $100 per barrel, and all sorts of predictions floated around as to how high it might go. Nobody thought it was headed for a 60% haircut, but that’s exactly what happened.
Unfortunately for Encana’s loyal shareholders, the company made two big oil acquisitions at the top of the market and loaded up the balance sheet with debt at exactly the wrong time.
The result has been a scramble to unload more gas assets and pay down the debt in an attempt to survive the oil rout.
The stock, which sold for more than $30 per share back in 2011, hit $7.50 in August. A relief rally of sorts has the stock back up near $11, but the next move is uncertain.
Rays of hope
Encana’s management team has to be commended for its crisis management.
The company is selling assets to get the debt level under control and expects to divest US$2.7 billion in properties and reduce the debt load by US$3 billion by the end of the year. Encana finished 2014 with US$7.8 billion in long-term debt, so decent progress is being made.
This should buy the company some more time to try to get through the crisis.
Cash flow issues
The big concern is the company’s cash flow because Encana isn’t bringing in enough money to cover its capital expenditures, let alone the remaining dividend.
The company has said that 2015 capital spending will be US$2-2.2 billion, while operating cash flow is expected to be US$1.4-1.6 billion. Based on the spending and cash flow numbers reported for the first six months of the year and the subsequent weakness in both oil and natural gas prices, the 2015 projections could turn out to be somewhat worse than expected.
Should you buy?
Encana is at the mercy of the commodity markets. If oil and natural gas prices are headed higher in the coming months, Encana will move higher with them.
At this point, making that call looks very risky. Even if you are an energy bull, I would wait for the Q3 numbers to come out before making a decision to buy the stock.
