After the carnage in the oil and gas sector, investors need to be very selective in picking stocks for the long-term. In general, it is best to avoid stocks that are highly leveraged or have asset exposure in regions that are exposed to high geo-political risk. With these points in consideration, Encana Corp (ECA, Financial) is one stock that looks excellent for long-term exposure at current levels. This article discusses the reasons to be bullish on Encana with some recent developments in view.
In my view, the valuations are certainly a big positive with Encana trading at a trailing twelve month EV/EBITDA of 3.72. The reason for considering this valuation as attractive will be clear when the positive triggers for considering exposure to the stock are discussed.
The first positive point is that Encana announced a $1.25 billion equity offering on March 4, 2015. Using the proceeds from the offering, Encana plans to pay $700 million aggregate principal amount of 5.90% Notes due 2017 and all of its C$750 million aggregate principal amount 5.80% Medium Term Notes (Series 4) due 2018.
This is a positive factor as Encana is focused on a conservative financial stance in difficult times and this equity offering will reduce the company’s total debt by over $1 billion. The equity offering will result in dilution of EPS in the near-term, but it will provide greater financial flexibility for the long-term.
For Encana’s senior unsecured debt, the S&P rating is currently BBB with a stable outlook and Moody’s rating is Baa2 with a stable rating. With the latest effort to reduce balance sheet leverage, Encana’s credit rating is likely to remain stable in these difficult times for the industry.
Another point that reflects the company’s conservative financial stance is the reduction in capital expenditure for 2015. The investment target has been reduced to $2 to $2.2 billion and this investment target will ensure that Encana’s capital expenditure is funded by 2015 operating cash flows and the company’s existing cash position (including cash from asset sale). Therefore, Encana’s total debt will be lower in 2015 than in 2014 even after a capital expenditure of at least $2 billion in quality assets.
Encana is clearly walking a conservative path because the company has $4 billion worth of excess credit facility. This can potentially be used for more aggressive investments. However, Encana is likely to wait for oil prices to recover before getting more aggressive on the investment front.
There is no doubt on the fact that Encana has four of the highest quality assets in North America. Permian, Eagle Ford, Montney and Duvernay assets can deliver oil at relatively low break-even point and this will be an EBITDA margin booster when oil trends higher over the next 1-2 years.
I expect slow recovery in oil prices in 2015 and the recovery in prices is likely to be more robust in 2016. I am mentioning this to underscore the point that Encana is unlikely to surge higher anytime soon. However, the best time to accumulate the stock is when sentiments are depressed.
In conclusion, Encana is a well managed company with sound financials and the company is likely to navigate the low oil price crisis relatively smoothly. Further, with quality assets, Encana is well positioned to deliver strong growth in the coming years. These points make the stock worth considering for the portfolio with a relatively long-term investment horizon.
