ENCANA CORP. $33 (New York symbol ECA; Conservative Growth Portfolio, Resources sector; Shares outstanding: 741.7 million; Market cap: $24.5 billion; Price-to-sales ratio: 2.3; Dividend yield: 2.4%; WSSF Rating: Average) is a leading North American natural-gas producer. The company focuses on unconventional reserves, such as shale gas deposits. (Shale gas is natural gas that is trapped in rock formations. To extract it, companies must pump water and chemicals into the rock. This fractures the rock and releases the natural gas.)
The company took its present form on December 1, 2009. That’s when the old EnCana Corp. split itself into two separate companies: the new Encana and Cenovus Energy.
If you assume the split occurred at the start of 2009, Encana’s earnings per share fell 22.2% in the three months ended March 31, 2010, to $0.56 from $0.72 a year earlier. These figures exclude several unusual items, such as gains on hedging contracts that Encana uses to lock in its selling price for natural gas. Cash flow per share fell 15.1%, to $1.57 from $1.85. Revenue fell 3.7%, to $3.5 billion from $3.7 billion.
Lower natural-gas prices were the main reason for the declines. Encana’s average selling price for gas fell 15.0%, to $6.14 per thousand cubic feet from $7.22 a year earlier.
Encana has hedged 60% of its 2010 production at $6.01 per thousand cubic feet. That’s 17.2% higher than today’s spot price of $5.13. The company has also hedged 30% of its 2011 production at $6.52, and 30% of its 2012 output at $6.46.
Despite these hedges, low gas prices will probably push Encana’s 2010 earnings down to $1.38 a share from $2.35 in 2009. Because of the depressed earnings, the stock trades at 23.8 times that estimate. However, it trades at a more reasonable 6.3 times its estimated cash flow of $5.25 a share.
Encana is a buy.
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