Encana Corp. (TSX:ECA)(NYSE:ECA) has been gaining positive momentum this year after declining steadily since the Great Recession. Encana posted an impressive quarter recently; it showed a surprise net profit compared to the loss it took last year. Is the company finally turning itself around, or is there more pain ahead?
Encana has been actively investing in ways it can lower costs. Encana was able to reduce costs by 31% compared to last year in the Permian Basin region. By lowering costs, the company will be able to better withstand another rout in commodity prices, and such a rout won’t put as much stress on the company’s bottom line.
The management team at Encana has shown great progress regarding the cost cuts and managing its considerable amount of debt. While most investors have given up on Encana after it has underperformed for the past few years, the company may finally be hitting a turning point.
Encana gave a growth outlook; it sees its future projects implementing major cost-cutting measures. It is streamlining operations in the production division, which will give a solid bump to the top and bottom line, assuming that oil continues to rally to the $60 level in 2017 as many pundits expect.
Encana sees its cash flow increasing by a whopping 300% and its profit margin doubling over the next five years. The production is also expected to increase by 60% over this period, and if oil prices return to their historical averages, this could mean Encana could recover to pre-recession levels and be investable for the average investor again.
Encana’s guidance is optimistic, but there is serious upside here if oil prices do start recovering. The company has been taking steps to reduce the pain it experienced over the past few years. Going forward, the company will be investing heavily in cost-cutting measures. If you’re bullish on oil, then Encana will be a fantastic turnaround pick.
The big risk for the company is if oil prices head back to the levels seen earlier this year. The company will struggle to make a profit at under $40 oil, and the amount of debt could get the better of it if oil hits the $20 level again.
Encana’s guidance is definitely overly optimistic, and you shouldn’t invest in the company based on what the management team tells you. There could be more pain ahead if oil prices retreat, but, according to most experts, oil should be on its way higher from here. Make sure you understand that you could suffer more losses from here if oil starts retreating again, which is entirely possible.
Encana doesn’t have a terrific balance sheet by any means, so if things head south, they could do so in a hurry. But with great risk comes great reward, because if oil continues to rally, we could see Encana’s profitability soar. If you’re a bull on oil prices, then Encana is a terrific buy right now as it heads higher, but if you’re not sure, proceed with caution and make sure you don’t invest what you can’t afford to lose.
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Fool contributor Joey Frenette has no position in any stocks mentioned.