Encana Corporation: Is it Time to Bet on This Turnaround Story?

Encana Corporation (TSX:ECA)(NYSE:ECA) has stumbled more than 50% over the last year. Is now the time to get into the stock?

The Motley Fool

It hasn’t just been oil producers who have been hit by the recent weakness in energy prices. Natural gas producer Encana Corporation (TSX:ECA)(NYSE:ECA) has also seen its stock fall by more than 50% over the last year.

Part of the issue has been the company’s ill-timed acquisition of Athlon Energy as well as the acquisition of approximately 45,000 net acres in the Eagle Ford area of Texas. Together, these two acquisitions set the company back more than US$10 billion, including assumed debt.

Those acquisitions were part of management’s grand plan to move the company out of natural gas and back into oil. It sold billions of natural gas assets, putting the proceeds into oil. And then the bottom fell out of the oil market.

But it isn’t all bad for Encana. Here’s why you should consider making a bet on Encana’s turnaround plan.

Great assets

Encana’s timing wasn’t great, but the assets it bought in the United States are still going to look very attractive once oil goes back to $100 per barrel.

Even with oil flirting with $40 per barrel, the company still isn’t losing much on production at both Eagle Ford and Permian. It isn’t making money either, but at this point in the cycle, just breaking even is okay.

The company also owns significant portions of land in the Montney and Duvernay areas of Alberta. These are low-cost assets that are running at approximately breakeven levels at today’s prices. Even if oil just marginally recovers, these are profitable assets.

Look at the company’s latest quarter. On the surface, it looked nasty, with it reporting a loss of $1.47 per share. But that was affected by asset write-downs. Without the asset impairment, Encana actually posted an operating profit of $323 million. That’s not so terrible in today’s environment.

Solid financials 

Encana has been busy paying off debt. Thus far in 2015 it raised more than US$1 billion in cash from a share sale and used the proceeds plus a little cash on hand to pay back US$1.2 billion in debt.

The balance sheet looks pretty good over the next few years as well. The company has no major debt repayments due until 2019, and it still has US$4.5 billion in available credit, which was recently extended from June 2018 to July 2020.

Encana is also making enough cash flow to pay for its capital expenditures and dividends if you include a couple of asset sales in the beginning of the year. The company expects 2016’s capital program to come in at a lower level than this year’s, which means that it should be able to generate enough cash flow in 2016 to fund all of its requirements. In other words, if it has to borrow, it won’t be much.

Unlike some of its competitors, Encana can still save money by suspending its annual US$0.28 dividend. That move alone would save it about US$240 million per year.

One issue with Encana is the number of write-offs it has been taking. It has already impaired nearly US$6 billion in assets thus far in 2015, putting it at a debt-to-assets ratio nearing 50%. It has the potential to get even higher if the company is forced to borrow to pay for its capital expenditures.

Should you buy?

I like Encana’s transition away from natural gas towards oil. It also still has non-core assets it can sell to help shore up the balance sheet. And over the long term, there’s a lot to like about its core assets in Texas and Alberta. These low-cost assets are going to look very attractive once oil rises again.

But at the same time, Encana has a few issues. The balance sheet is a little weaker than some of its better-capitalized competitors. And from a book-value perspective, many of its peers are more attractively priced, implying that they might have more upside when things return to normal.

Encana looks to be a relatively safe pick, and you’d get a fairly attractive dividend to wait. There may be better opportunities in the energy sector, but it’s hard to go wrong with one of the leaders, even if it has momentarily stumbled. Ultimately, an investment in Encana is just a bet on recovering energy prices, which will happen sooner or later.

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 stocks mentioned.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »