Shares of Encana Corporation (NYSE:ECA) lost 25% of their value in November, according to data provided by S&P Global Market Intelligence. Driving the sell-off was a plunge in oil prices as well as the company's decision to acquire fellow oil producer Newfield Exploration (NYSE:NFX).
Encana's stock tumbled to start November after the company unveiled its stunning decision to buy Newfield Exploration for $5.5 billion in stock. While Encana saw the deal creating the second-largest shale producer in North America, investors saw it as a reversal of the company's recent strategy to focus on its best shale assets. One of the market's main concerns is that Encana is adding a new region to its portfolio, the STACK Shale of Oklahoma, which increases its execution risk since the company might not be able to apply its learnings in the Permian Basin to this region.
Adding even more pressure to Encana's stock price was the sell-off in the oil market as crude prices tumbled 22% last month. That's after the market shifted from worrying about a supply shortfall to a potential glut due to the U.S. granting waivers to most buyers of Iranian oil ahead of the recently reimposed sanctions on the country. That slump in oil prices comes just as Encana is increasing its exposure to crude by acquiring the oil-focused Newfield. Because of that, lower oil prices hit the company's cash flow, which could affect its ability to return money to shareholders in the future via its recently increased share buyback program.
Investors punished Encana's stock last month after it deviated from its strategy and oil prices crashed. While shares could have big-time upside if the company's bold bet on the STACK pays off and oil prices rebound, the stock could continue to fall if its oil wager doesn't pan out.