Oil’s recent recovery is lighting a fire under the energy sector, and investors are wondering which names offer the most upside potential on further gains.
Let’s take a look at Encana Corporation (TSX:ECA)(NYSE:ECA) to see if it deserves to be in your portfolio.
A wild ride
Encana has been decimated over the past five years, dropping from $30 per share to the recent low near $4. That’s an ugly chart for a company that once held the distinction of being Canada’s top company.
The crash in crude prices over the past two years is to blame for the recent pain, but Encana’s troubles began even before the latest oil rout.
After the financial crisis, Encana decided to focus on natural gas and spun off the oil sands and refining assets into Cenovus Energy. As we all know, gas prices subsequently plunged on the shale boom and oil rocketed higher on the back of global stimulus action.
Then, with oil trading above US$100 per barrel, the new management team reversed course and loaded up on debt to acquire oil properties just before the recent rout.
As a result, Encana has been in survival mode for the past couple of years, and investors pretty much left the stock for dead just a couple of months ago.
The positive news?
Encana has done a good job of reducing costs and paying down the debt load through the crisis. The company finished 2015 with US$4.7 billion in debt, which is still hefty, but none of the notes are due before 2019.
Capital spending has been substantially reduced to just under US$1 billion for 2016, with 95% of the funds focused on the company’s four core assets located in the Eagle Ford, Permian, Duvernay, and Montney plays.
Encana has also hedged 75% of its March-December oil and natural gas production, which should help the company if the recent oil rally proves to be another head fake.
The company’s foray back into oil might have been ill timed, but the assets are top notch, especially in a rising oil environment. Encana holds nearly 290 million barrels of oil and NGL reserves, and its remaining natural gas portfolio is still substantial at more than three trillion cubic feet of proved net reserves.
Should you buy?
The 120% rally off the February low shows how much upside potential the stock has if the oil recovery takes hold. Encana is still sitting on a lot of debt, so the name remains risky, but investors who believe the oil rout is over might want to start nibbling on further weakness.
There is also a chance that Encana will become a takeover target, and any approach by a suitor would send the stock higher.