Over the past five years, the company has been reinvesting and acquiring like mad, looking for further “premium,” high-yield, liquid-rich locations to serve the energy company better over the next decade. And whereas in the past about 90% of the company’s production was considered high-cost natural gas, that has since dropped to 50%. This should increase the company’s profitability and margins and start to show some long-term success is truly within reach.
But the company also has a lot to prove.
Encana still has a number of lower-margin legacy assets that right now are holding up the company while they prepare for this transition to premium liquids. These are the assets that will pay for the acquisitions of new locations, including Eagle Ford and Permian. And honestly, they couldn’t have purchased them at a worse time.
Analysts believe the company overpaid and diluted shareholders’ value in the process for these locations, making the stock oversold. With oil prices the way they are, the company is going to have to do some serious work to continue its expansion process, and this could erode its profitability — witnessed most in its latest quarterly report.
Encana reported a net loss of $245 million from the quarter, with production of 468,000 barrels of oil per day much lower than expectations. Operating profit rose to $165 million, and cash flow reached $422 million at a 6% increase from 2018.
But it’s not all bad news, especially from management’s perspective. In fact, management announced a 91-million share-buyback program that was launched in March, buying 55.9 million at $7.16 per share, and still believes its stocks are cheap.
Then there was the Newfield acquisition, which can be seen as quite the positive, even though it increased costs in the short term to provide severance pay. The acquisition saw a 15% reduction in the combined company’s workforce. The acquisition should help the company produce more oil than it needs to support its continuing expansion.
Over the next 12 months, management will commit to an aggressive agenda that includes finishing its buyback, pumping out its dividend, and getting free cash flow positive at a low to mid $50-per-barrel West Texas Intermediate oil price. Basically, they refuse to go back to a few years ago when the company went into survival mode, cutting back on everything to turn a profit.
But it’s not the next year that should interest investors. In fact, the next 12 months look a bit shaky. At the time of writing, the stock trades at around $9 per share, and that could go down as low as $7.50 and as high as $17.50 by this time next year. But if you’re looking to buy and hold this stock, it could be a great investment today. At least, management thinks so with all the moves they’re making.
It’s a bit unclear when the high-quality liquids will really start to pump out, but when they do, this company could start to produce shares as premium as its assets. This makes this stock a bit risky as the moment, but with a reward potential that could bring it back to a share price in the $90s — not seen since 2008.
Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.
Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned.