I tend to talk about Enbridge a lot in my articles. And granted, I’m not about to bash it in this one. Enbridge is still a great option to buy ahead of any major growth in the oil and gas industry.
But it’s not alone in that field.
Another great option moving up the ranks is Encana (TSX:ECA)(NYSE:ECA), a company that has been pivoting towards a much more lucrative route in the last little while. And since it’s a fraction of the cost of Enbridge, this stock should be the next one you consider for your portfolio.
What’s happening lately
As I mentioned, Encana has been moving its portfolio to more liquid production and low-cost U.S. petroleum. This started back in 2016, when growth of liquid sprung up to 30% annually. Today, that number has jumped to 75% of capital spending and 55% of its production. This is great news for investors, as liquid tends to mean easy cash in pocket, and 2019 looks to be headed in that direction.
It’s also great news for investors, as since announcing this transition, the company has grown its dividend and started a $1.67 billion buyback plan, which is about 10% of the entire company.
Like I said, there is now a lot of cash in Encana’s pockets. In 2018 alone, Encana generated about $412 million of free cash flow. That number should only increase, as Encana has plenty of room for cost-cutting as it continues to benefit from rising production, higher oil prices, and declining costs.
Encana’s five-year plan basically looks solid: to maximize cash flow and increase margins. Honestly, it’s pretty much already there. With its earnings release set for Apr. 30 and shares currently trading well below fair value at $9.70 at the time of writing, this is probably as good a time as any to jump on this stock.
What about long term?
Still not convinced? Granted, this is a five-year plan, whereas a company like Enbridge is set up with long-term contracts that last decades.
Well, Encana is set up to get there. The company currently has about 20,000 drilling locations that could take decades to work through, half of which are designated as a “premium,” meaning management won’t run out of high-graded inventory for quite some time.
This is what really contributes to the company’s undervalued price, which should be closer to $13 per share. In the next 12 months, that number could go up substantially to $18 per share. And that could only be the beginning as Encana continues to drill premium liquid out of its many locations.
So if you have, say, $10,000 that could use a big boost, I would consider Encana. Buying now, before the earnings report, could bring the stock back up to fair value in the short term, turning your $10,000 into $13,390. In 12 months, if things go to plan, that number could jump again to $18,540.
And all that isn’t even glancing at Encana’s peak performance, when the stock hit $94 per share back in 2008. If things get to that level again, you could be looking at turning your $10,000 in $95,790. So, I would definitely buy and hold on tight to this stock.
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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. Enbridge is a recommendation of Stock Advisor Canada.