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Stock Strategist

Encana Reaps Benefits of Transformation

The company emerges from a transitional year with an exceptional asset portfolio.


 Encana (ECA) has transformed itself in the past year and a half, and its future is now solidly underpinned by cost-advantaged growth. This is a radical shift from the past, when the company was a lower-margin natural gas producer. Our $16 (CAD 19) fair value estimate is predicated on our belief that commodity prices will recover during the next few years. However, Encana also is one of the most defensive upstream stocks. The firm is well hedged (60% of 2015 volumes), and its balance sheet is in good shape.

Encana's impressive asset portfolio is the product of a transformation that began 18 months ago. At that time, the firm's mix was skewed heavily toward natural gas (90% of 2013 volumes) and the bulk of that production was sourced from its Clearwater, Piceance, and Haynesville assets, which are all higher on the cost curve. Management's goal was to boost cash flows and returns by executing a positive mix shift and deploying capital on high-margin, liquids-rich assets. The company defined a core list of five liquids assets: the Montney, the Duvernay, the Denver-Julesberg Basin, the San Juan Basin, and the Tuscaloosa Marine Shale. All other assets were marked for sale.

Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.