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Anyone who invested in EnCana Corp. (NYSE:ECA) during its periodic dips over the past 12 months must be smiling now that the energy stock has risen to within pennies of a new record high. But what is it going to take to keep investors smiling?

EnCana shares have been on a tear this year, rising 29%. That is more than three times the pace of the S&P/ TSX composite index. The shares closed yesterday in Toronto at C$69.35, up 3.4% and just 13¢ below their post-Katrina record close in 2005.

They are also outpacing their competitors in the Canadian energy universe, including Canadian Natural Resources, Suncor Energy, Talisman, Petro-Canada and Imperial Oil, whose shares lag with returns averaging 10% this year.

EnCana's outperformance is remarkable, given that the price of natural gas -- which represents about 80% of the company's total energy production -- remains well off its post-Katrina high of about US$15 per thousand British thermal units. Since then, it has generally bounced between US$6 and US$8 per thousand BTUs, proving itself to be a laggard next to crude oil.

Clearly, some investors are betting that the relative warmth of the past winter, which depressed natural gas prices, is unlikely to be repeated. Others are betting that this year's Atlantic hurricane season, which began this month, is going to threaten energy production in the Gulf Coast and send gas prices higher.

And then there are the usual arguments about the ongoing demand for commodities worldwide, which should drive oil and gas prices higher. Yesterday, the OPEC oil cartel said it would not open its oil taps any wider, which triggered a rally in global energy stocks because of a perception of tight energy supply amid strong demand.

EnCana, though, has also benefited from more specific factors. Robert Plexman, an analyst at CIBC World Markets, noted this week that EnCana shares are undervalued relative to integrated oil producers -- a key factor as the company ramps up its oil refining production, thanks to its oilsands joint venture. These changes should lead to a higher multiple on its earnings and cash flow, a trend investors may be picking up on.

For example, EnCana's shares trade at 10.5 times Mr. Plexman's estimated earnings for 2008, while Canadian integrated oil stocks trade at a far richer 13.6 times earnings. At the same time, En-Cana shares trade at 5.5 times cash flow per share, far behind the 8.4 multiple enjoyed by the integrated producers.

Analysts are not alone in their enthusiasm. Southeastern Asset Management, a well-regarded U.S. money manager, swooped down on EnCana earlier this year, telling clients that the weak price of natural gas and the company's competitive oilsands project makes the stock an attractive, though undervalued, holding. Southeastern owns 4.9 million EnCana shares in its international fund, worth a substantial $340-million.

Clearly, the best time to invest in EnCana was about C$15 ago, in March. Mr. Plexman believes the shares could rise to C$75 within the next 12 months, giving them a return of 8% if you bought them today. That is hardly exciting. Worse, a number of other analysts have seen their target prices surpassed.

Indeed, the best hope for big gains ahead will likely come down to natural gas: If prices rise from their stupor, EnCana shares will spread a lot more joy.

Source: EnCana: Outperforming Natural Gas Play With Much Potential Remaining