Peer group analysis
| % Natural Gas | P/CF (2012) | P/CF (2013e) | |
| Encana | 90% | 4 | 4.9 |
| Talisman | 62% | 4.1 | 4.9 |
| Peyto | 89% | 14.5 | 9.8 |
| Nuvista | 70% | 10.8 | 11.9 |
As we can see from the table, Encana is the most heavily involved in North American natural gas production. This has proven to be a liability in recent years, but given my thesis on the future of natural gas, this could easily become a great strength of the company. In the meantime, Encana will divert funds to liquids in order to strengthen cash flow and the health of the company. Further to this, Encana is one of the most attractively valued, at 4 times 2012 cash flow.
Peyto Exploration & Development Corp (TSE:PEY)
Peyto Exploration & Development Corp (TSE:PEY) has been very successful in its natural gas strategy, achieving very strong production growth, a very low cost structure, and very strong capital efficiencies. Its share price performance and valuation reflect this however, with the stock up 37% year to date and a very expensive valuation of 14.5 times 2012 cash flow. At these levels, I think the stock is too expensive and I don’t see much upside.
Talisman
While the valuation is attractive, the company is struggling to gain focus and control costs. Furthermore, the natural gas weighting is lower and given my thesis, I am looking for companies with a greater focus on North American natural gas.
Nuvista
Nuvista is also trading at a premium valuation. With a much smaller resource base and higher cost structure, I believe that Encana fares much better than Nuvista if you want to play the changing gas market.
Bottom line
For the long term investor, industries and companies that are not in favor are great places to look for great ideas. Out of favor companies have low valuations and low expectations, so this is where to find bargains. Seeking out strong and healthy companies in an out of favor industry, with valuable assets and competitive advantages will minimize downside risk while being well positioned to take advantage of the upside when the fundamentals turn around. Encana Corporation (USA) (NYSE:ECA) is a prime example of this: an out of favor company in an out of favor industry. And it looks like the tide is turning.
The article Encana: Why Investors Should Take Notice originally appeared on Fool.com and is written by Karen Thomas.
Contributor Karen Thomas owns shares of Encana, Nuvista and Talisman. The Motley Fool has no position in any of the stocks mentioned. Karen is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
