Encana (TSX:ECA)(NYSE:ECA) is one of the most popular stocks on the TSX. More than $80 million worth of shares trade hands every day. Yet recently, the company has experienced a fall from grace. Over the last five years, shares have fallen by two-thirds, representing $10 billion in market value.
Even as the stock approaches an all-time low, Encana is still being valued at $5.2 billion. Company executives have indicated to shareholders that they’re more bullish than they’ve been in years. Still, shares shed another 6% in November.
If management is correct, 2020 could be a year of huge gains for Encana stock. Why then are shares still headed lower?
A long time coming
In late October, Encana announced that it will re-domicile to the U.S., changing its name to Ovintiv. If you’ve been following the company, this shouldn’t be a surprise.
For years, Encana has been executing a bold strategy shift. In 2013, 85% of its reserves were natural gas. As such, the company traded as a natural gas producer. That was a terrible position to be in. From 2003 to 2008, Henry Hub natural gas prices averaged roughly US$8. Following the fracking boom, however, prices slid dramatically. From 2009 to 2014, prices averaged just US$4. Over the last five years, average pricing slumped below US$3.
Yet over this period, Encana has moved to reduce its natural gas exposure. Today, only 45% of reserves are natural gas, with the remainder constituting liquids with superior economics like crude oil. Oil and condensate production has increased by 700% since 2013.
This strategy shift has paid off handsomely. If the company still had its 2013 reserve and production profile, it would have generated just $800 million in cash flow. With its current profile, however, it’s on track to generate $3.4 billion in cash flow. That’s quite a difference, yet the market hasn’t rewarded the company for its pivot.
Since 2013, shares have shed 70% of their value. By changing its name and re-domiciling to the U.S., executives hope to turn a new chapter for the company, opening it up to increased capital flow and investor interest.
The move “will expose our company to increasingly larger pools of investment in U.S. index funds and passively managed accounts, as well as better align us with our U.S. peers,” CEO Doug Suttles said.
Time will tell
The market clearly wasn’t impressed by the company’s plans, as shares fell an additional 6% in November.
“The lack of a clear long-term strategy, elevated leverage metrics and lingering concerns regarding inventory length remain much more significant drivers of share price performance than the name and location of the corporate mailing address,” noted Raymond James Financial analyst Amber Kanwar.
In reality, the move could create near-term selling pressure, as Canadian funds look to dump the stock ahead of the relocation. The S&P/TSX Composite Index, for example, only holds Canadian companies. Any funds tracking this index may be forced to sell Encana, a potential reason for the 6% loss this month.
Long term, however, Encana will sink or swim based on free cash flow generation and long-term financial performance. In 2020, management expects free cash flow to remain positive, but a lower-for-longer pricing environment will make it difficult to attract additional investors.
