There is no doubt that Encana Corporation (USA) (NYSE:ECA) has been a disappointment in the last few years. The company’s decision to focus on natural gas was the epitome of bad timing, as natural gas proceeded to head south shortly after that decision, falling to lows of just over $2.00 from a high of over $13.00 back in 2008.
More recently, the company is mired in uncertainty as they await the appointment of a new CEO. Furthermore, investors are questioning the sustainability of the dividend. Beyond these headline grabbing news items, however, lies tremendous value waiting to be realized as the natural gas market is increasingly seeing new demand from the transportation industry in North America. Longer term, demand will also come from energy starved countries when the North American natural gas market is opened up to the world through LNG exports. Encana Corporation (USA) (NYSE:ECA) is well positioned to reap the rewards.
Expanding natural gas market
There is an increasing investment in liquified natural gas in the transportation industry that is gaining momentum. Last year, Ford Motors sold a record 11,600 natural gas vehicles, an increase of over 400% compared to 2 years ago. The trucking industry is also becoming increasingly interested in LNG. Bison Transport, one of Canada’s largest truckload carriers, has partnered with Shell Canada to test the use of LNG and is currently running some of its fleet in Calgary on liquefied natural gas. Shell is opening fueling stations in Calgary, Red Deer, and Edmonton. Also, the railway industry is considering LNG as their fuel of choice. BNSF Railway announced plans to test the use of natural gas fired engines this year. Finally, LNG terminals are being planned and commissioned on the West Coast and in the Gulf, in order to open up a new market for natural gas, an export market that would supply energy starved countries. It looks like we on the cusp of a big shift in the natural gas industry and significant increases in demand for natural gas.
With Encana Corporation (USA) (NYSE:ECA)’s stock trading at approximately $19.00, and natural gas prices on a steady climb since 2012 (up 85%), Encana is in a sweet spot. Commodity price expectations are in the process of being revised upwards, and the company has been focusing on improving its cost structure. The company is also well positioned to be a major supplier to LNG terminals when the time comes.
– The stock is trading at low valuation levels. Price to cash flow is 4 times 2012 cash flow estimates. This is a very attractive valuation.
– Encana Corporation (USA) (NYSE:ECA) is one of the largest natural gas producers with decades of inventory.
– Overly negative sentiment on the stock and on the natural gas market, as evidenced by the fact that we have seen 5 consecutive quarters of positive earnings surprises from Encana Corporation (USA) (NYSE:ECA), and we are now seeing natural gas price forecasts being increased.
– Good cash position. There is currently almost $3 billion in cash on the balance sheet. Although this will be reduced going forward to support spending, this is a good cushion.
– Encana Corporation (USA) (NYSE:ECA) is focused on achieving greater efficiencies. Cost reductions and improved efficiencies are expected to be seen as early as Q3 or Q4 of this year.