The recent surge in oil prices sent Encana Corporation (TSX:ECA)(NYSE:ECA) up more than 90% in less than a month, and investors are wondering if the time has come to take a position in the stock.
Let’s take a look at the beleaguered oil and gas producer to see if it should be a top pick to play a rebound in the energy sector.
Tough times
Encana’s shareholders have had a rough ride over the past five years as the stock dropped from more than $30 per share to the recent low just above $4.
The rout in the oil market has been tough on the entire industry, but Encana has really taken a beating because it loaded up the balance sheet with debt to make a couple of expensive oil purchases just before oil prices cratered.
Encana has been in survival mode ever since, and the company’s leaders have done a pretty good job of navigating the storm considering the challenges.
Positioning for a recovery
Back in December the company said it planned to spend US$1.5-1.7 billion in 2016 on capital projects, assuming cash flow would be US$1-$1.2 billion based on an average WTI price of US$50 per barrel.
The market outlook worsened in the first part of 2016, and revisions have been made to the 2016 plan.
The Q4 2015 report indicates capital spending will now be US$900 million to US$1 billion this year with 95% of the money being put into the company’s four core assets located in the Permian, Eagle Ford, Duvernay, and Montney plays.
Encana finished 2015 with US$4.7 billion in long-term debt. That’s a lot lower than where the company started the year, but it is still a big load to carry. Fortunately, none of the notes are due before May 2019.
The company continues to reduce costs, which should help cash flow in 2016. The headcount is coming down another 20% this year, bringing the total cuts to 50% of the workforce in just three years.
Encana has hedged 75% of its 2016 March–December oil and natural gas production. The decision is probably a prudent one, given the volatility in the market. Oil prices have enjoyed a nice run over the past few weeks, but that could reverse course in short order. Natural gas continues to plummet and now trades at 17-year lows.
Should you buy?
If you believe oil has bottomed, Encana is certainly a name worth considering, but the stock remains extremely volatile. At the time of writing, Encana is plunging more than 12% on negative oil news.
Given the extent of the recent rally, it would probably be wise to stay on the sidelines right now, but contrarian investors might want to take a small position on another pullback.
Why?
The recent 95% surge in the stock shows how much upside potential there is on higher energy prices. Encana could also find itself the target of a takeover bid if merger activity starts to heat up. The company holds 3.1 trillion cubic feet of proved net natural gas reserves and 288.8 million barrels of oil and NGL reserves, which could attract larger players in the sector who still have strong balance sheets and can ride out a prolonged slump.
