Image source: Encana Corp.

Encana (OVV -0.47%) spent the past few years repositioning its portfolio and balance sheet to put it in the position to resume high-octane growth. This included selling off lower margin assets and using that money to pay down debt and acquire higher margin growth assets. With this transition complete, the company is ready to restart its growth engine with it projecting robust growth over the next five years.

Building an inventory

One of Encana's primary focuses over the past couple of years has been to develop an inventory of future drilling locations in the best resource plays in North America. This led it to spend billions to acquire positions in the Permian Basin and Eagle Ford shale plays. When the company combined those two new regions with its legacy positions in the Montney and Duvernay plays in Canada, it gives it more than 20,000 future drilling locations, which is double what it had just one year ago.

More importantly, about half of that inventory consists of premium return locations, which are those Encana defined as generating more than a 35% after-tax rate of return at current prices. This is a similar designation as shale leader EOG Resources (EOG -0.90%), which defines premium wells as those that generate at least a 30% after-tax rate of return at flat $40 oil. Currently, 6,000 of EOG Resources' 16,700 total locations fit the premium definition, and the company has thousands of additional well locations on the cusp of becoming premium locations to replenish its supply as it restarts production growth next year.

Ready, set, grow

Speaking of returning to growth mode, that is just what Encana plans to do next year now that its balance sheet is on solid ground, commodity prices are improving, and it has a growing supply of premium locations. Under the company's current estimates, it believes that it can grow its production by up to 60% by 2021 while at the same time growing its cash flow by a stunning 300%. Further, it believes it can do that while only consuming roughly 15% of its premium return inventory, leaving it plenty of growth potential beyond that timeframe.

That low double-digit annual production growth rate is very much in line with what rivals are forecasting. EOG Resources, for example, recently put out its 2020 crude oil production outlook. Its long-term plan projects 10% compound annual production growth through 2020 at flat $50 oil with that growth rate accelerating to 20% at flat $60 oil. If oil goes higher, EOG Resources and Encana have the drilling inventory and the cash flow to grow at an even more rapid pace.

That said, what's worth pointing out is that neither company is planning to grow for the sake of growth. EOG Resources' plan prioritizes drilling returns over anything else while cash flow growth drives Encana's plan over an absolute production growth number. That is important because this focus on driving financial growth as opposed to total growth should fuel stronger shareholder returns for Encana and EOG compared to rivals that are growing just because oil prices are improving or they have the money to do so.

Investor takeaway

Encana is revving up its growth engine as it plans to accelerate drilling activities next year. However, while it plans to deliver healthy production growth, that is only because the incremental output will fuel an even larger supply of cash flow. It is that focus on growing cash versus just growing for the sake of growth that sets it apart from most of its peers.