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Here's Why Encana Corporation's Stock is Rallying Today

By Matthew DiLallo – Feb 24, 2016 at 6:30AM

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Investors really liked that the Canadian oil and gas company is cutting spending, its dividend, and its workforce.

Image source: Copyright © Encana Corporation. All rights reserved.

What: Shares of Encana (OVV -0.58%) rocketed higher on Wednesday, up by 19% at 11:00 a.m. EST. Fueling the surge was the company's fourth-quarter results as well as the announcement a number of big cuts to better align its cost structure to the currently tough operating conditions.

So what: Encana reported strong fourth-quarter production, with production from its core assets up 35% year over year, exceeding its target. Further, cash flow actually increased 3% over the prior quarter to $383 million despite weaker commodity prices. That's due in part to increased production, but also because the company cut spending more than expected in order to better align it's cost structure with current commodity prices.


In addition to announcing operational and financial results, Encana detailed additional spending cuts to better manage through this downturn. The company is reducing its workforce by 20%, cutting its dividend from $0.07 per share to $0.015 per share, and reducing capex spending by 55%. The spending cuts are expected to save the company $550 million in 2016, while the capex cut will cause its production to decline from the 405,000 barrels of oil equivalent per day, or BOE/d, it produced in 2015 to 340,000 to 360,000 BOE/d in 2016. However, much of that decline is coming from assets outside its core, which is where its spending the bulk of its capex.

Now what: Investors like that Encana's cash flow is staying steady even though commodity prices are weakening. Further, they like the company's conservative plan for 2016, which will see additional spending cuts. This is giving them the confidence that Encana is making the necessary moves to manage through the downturn.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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