What's Next For Encana After Its Big Deal?

| About: Encana Corporation (ECA)

By Tim Kiladze

Now that the fanfare around Encana’s $2.9-billion asset sale to Mitsubishi has died down, everyone wants to know what’s next.

The deal, for the most part, was pretty widely praised. Encana (NYSE:ECA) got a good price, and the sale generates some desperately needed cash in a low natural gas price environment. But now what does the company do? Analyst Greg Pardy of RBC Dominion Securities sought to address that very question in a new research note. As he put it, “the journey begins.”

The main message: Encana must quickly diversify its natural gas predisposition.

“Encana’s success with material liquids growth is not optional in 2012 given its dry gas weighting, while time is not a luxury the company can necessarily afford,” he noted. “...Encana may need to consider an oil or liquids weighted acquisition that would augment its organic prospects with a more immediate and concentrated development fairway which plays to its execution strength.”

“While boosting a 6 per cent liquids production weighting towards something closer to 15 per cent is not unlike turning around a battleship,” he added, “the good news is that with an oil-to-gas ratio of 35:1, Encana’s revenue mix will shift much more rapidly.”

Encana appears to understand this. As the Globe’s Carrie Tait pointed out earlier this month, the company has been touting its oil and natural gas liquids production, trying to convince people it already has a diversified platform, even though it is North America’s second-largest natural gas company.

Only time will tell how forcefully the company is willing to act. But Mr. Pardy notes that Encana has made smart moves in the recent past, and could very easily do so again. “The best strategic move that Encana has made over the past two years was its decision to layer in substantial natural gas hedges back in March 2010,” he wrote. For this reason, 68 per cent of its gas production is hedged at $5.80 per mcf, offering a “massive reprieve” from prices hovering in the $2.50-$3.00 per mcf neighbourhood.

Disclosure: None