Let’s take a look at the current situation to see if Encana deserves to be in your portfolio.
Encana announced plans on September 19 to offer 107 million new shares at US$9.35 per share for expected gross proceeds of just over US$1 billion.
The stock initially dropped on the news, but has since recovered above the issue price.
Encana plans to use about half of the net proceeds to help fund its 2017 capital program. The remainder will be used to repay cash borrowed on the company’s credit facilities.
Is this a good sign for investors?
The positive effect is a more stable balance sheet. Encana finished Q2 2016 with US$3 billion in available credit out of its US$4.5 billion facility. Paying back some of the loans will give the company more flexibility to fund operations if oil prices weaken in the coming months.
The negative view
Encana’s stock has been rising since late February, so the fact the company is raising so much money right now suggests the management team could be of the opinion that a top is in on the rally. If that’s the case, the decision to raise cash now is a smart one for Encana, but it’s not a great sign for owners of the stock.
Tapping the market right before the end of Q3 also suggests the third-quarter numbers probably aren’t going to shoot the lights out. This shouldn’t be a surprise. Encana posted negative free cash flow of US$33 million in Q2 and negative free cash flow of US$209 million for the first half of the year.
Should you buy?
Long-term debt was still US$5.69 billion at the end of June. That’s a lot for a company with a market capitalization of US$8.25 billion.
The oil market remains volatile and most of the recent support has been driven by speculation on a possible production-freeze agreement between OPEC, Russia, and Iran. Analysts are skeptical a deal can be reached, let alone honoured, so oil investors have to be careful in the next few months.
I would tend to view the share issue as a sign that management might be negative on the short-term outlook for the market. Given the fact the company is already generating negative free cash flow, investors should avoid the shares.
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Fool contributor Andrew Walker has no position in any stocks mentioned.