Natural gas fans, fear not. The best companies in this business are built to withstand the kind of turbulence we've seen in recent weeks.
Take EnCana (NYSE:ECA), for example. Sure, the second quarter was fun for producers. Natural gas prices, on a NYMEX basis, were up 45% over the prior year. But the company has hedges in place to secure adequate cash flows, and realized gas prices were up only 12%. Those hedges are the main reason why per-share earnings were down double digits even though cash flow was up double digits.
It's not often we get to hear about firms' long-term price expectations, but EnCana gave some very informative commentary on its conference call. The firm pointed to $8 or $8.50 natural gas as "basically what we built our entire program on." The fact that they've been getting $10-plus lately is just gravy, and allows the firm to plow even more cash flow into new leasehold acreage and development drilling in places like the Haynesville Shale and the Horn River Shale, where folks like XTO (NYSE:XTO) and Apache (NYSE:APA) are also having a field day.
So does the machine break down below $8? Not at all.
If natural gas prices keep sliding, you'll see companies like EnCana, Chesapeake Energy (NYSE:CHK), and Anadarko Petroleum (NYSE:APC) scale back their highest marginal cost plays. But these companies all have plays that still offer strong returns at far lower prices. EnCana identified the breakeven point for its overall portfolio at $4.75 or so.
$4.75!
I know I'm neglecting the oil side of the business, which, come next year, will be split off and run as a separate entity. I just can't get over the attractiveness of EnCana's resource play portfolio. The shares are getting silly cheap here, and if it weren't for the forthcoming company breakup, I'd expect management to jump back on the share repurchase train, pronto.
EnCana is rated five stars in Motley Fool CAPS. I'm giving these guys an outperform rating right now. What's your call?
