Over the last few weeks, the price of natural gas has plummeted, reaching as low as $2.30 per million BTUs. A warm winter has led to concerns about the ability to work down the built-up supply, which is likely to lead to weak pricing. As the price of natural gas languishes, I can't help but continue searching for producers that might benefit from a rebound, however distant that might be. One company poised to benefit from higher natural gas prices is Encana (NYSE: ECA).
Company snapshot:
| Market Cap | $13 billion |
| Net Debt | $7.2 billion |
| TTM Operating Cash Flow | $3.9 billion |
| TTM Capex | $5.2 billion |
| Price-to-OCF Ratio | 3.4 |
| Price-to-Book Value | 0.8 |
| Recent Price | $17.69 |
| Dividend Yield | 4.6% |
Source: S&P Capital IQ
Before going into Encana's assets, it's worth noting that the company trades at low multiples of both cash flow and book value, which is always good enough to pique my interest. A 4.6% dividend yield isn't bad either, though it's worth exploring the effects of such a healthy dividend on a company with such heavy capital requirements.
Taking a closer look
Encana has a diverse portfolio of assets spanning many parts of North America. The company has 12 million net acres of land, including 2.1 million net acres in emerging oil and liquids-rich natural gas plays. Encana put $1 billion into liquids-rich and oil plays last year, and is likely to invest heavily in them in 2012 as well. Some of the liquids-rich areas likely to receive capital spending proceeds are the Cutbank Ridge area, the Alberta Deep Basin, and the Duvernay and Tuscaloosa Marine shales.
Like almost every other North American explorer and producer, Encana is participating in the shift toward liquids. Here are some things to watch in 2012:
- Encana should continue its divestiture program aimed at selling mature assets such as the Barnett shale, along with various midstream assets. These moves are meant to rebalance the portfolio toward emerging liquids plays and to strengthen the balance sheet.
- The company plans to pare back its Haynesville drilling program, where it had 20 gross rigs (11 net) operating in 2011 with its partner, Royal Dutch Shell (NYSE: RDS-A). This should facilitate the company's plan to shift more drilling rigs toward liquids. In 2012, the number of rigs operating in the Haynesville should fall by about half.
- While Encana's capital spending dollars are shifting away from natural gas plays, it still depends on natural gas for cash flow. Encana should enjoy strong cash flow from its natural gas hedges this year, with about 2 BCF per day hedged at the very attractive price of $5.80. The company's hedging situation does look much weaker in 2013, with only about 0.5 BCF per day hedged in 2013 at $5.25. That's still a very strong price, but it only constitutes a quarter of the hedged volume for 2012.
- Encana is hoping to complete a joint venture deal for its liquids-rich Cutbank Ridge asset. The company hopes to complete a 40%-50% cash-and-carry-type transaction, which should end up lightening its capital outlays in the future, as it hopefully sells off working interests in this asset for drilling and completion carries. That's a solid strategy for a company with so much land that it would be cost-prohibitive to develop it all on its own.
Foolish bottom line
It's still early, but I like what I see so far in Encana. It reminds me most of Devon Energy (NYSE: DVN), another attractively priced explorer and producer with a diverse portfolio of assets in both the United States and Canada. The question for me is whether Encana is more attractive than peers, such as Devon Energy and pure play producers of natural gas. Regardless, it has landed on my watchlist, where I'll be monitoring its developments.
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