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While the Street is currently leaning more towards the "sell" side for EnCana (NYSE:ECA), I find the company has strong near-term potential (ratings source: T1 Banker). Canadian Natural Resources (NYSE:CNQ) is rated a "buy" and is overly discounted, given its remarkable earnings outlooks. Based on my review of the fundamentals, I find attractive upside for both companies.

From a multiples perspective, Canadian Natural is the cheaper of the two. It trades at a respective 28x and 11.8x past and forward earnings, with a dividend yield of 0.9%. EnCana trades at 33.4x forward earnings, but offers an attractive dividend yield of 4.0%. To put this in greater context, consider that Cenovus Energy (CVZ) trades at a respective 23.2x and 15.7x past and forward earnings, with a dividend yield of 2.2%.

At its fourth-quarter earnings call, EnCana's management highlighted impressive performance in a challenging environment:

"I'm very proud of EnCana's strong operational performance during a year that was very difficult for natural gas producers. Throughout 2011, natural gas prices remain depressed, but Encana stayed true to our history of meeting our commitments. We delivered excellent operational results despite the low gas price and many cost and operational challenges reported by other operators. We made several advancements in our resource play hub development model with many of our resource plays now trending towards sub-$3 per MCF supply costs. Our low-cost structures were major factors in our ability to deliver solid cash flow and operating earnings in this low natural gas price environment.

At a company-wide level, we met our targets with respect to total production, cash flow and capital spending, while our operating costs and administrative expenses came in lower than our guidance".

EnCana recently entered into a joint venture agreement with Mitsubishi. Mitsubishi will take 40% ownership of 409K net acres at Cutbank Ridge for C$1.45B, and an additional C$1.45B investment over the next five years. These terms are much better than the previous deals for peers.

In general, trends are pointing beneficially in favor of EnCana to a greater extent than the market appreciates. Net debt has been forecast to fall to $6.2B by 2013, while ROE has been forecast to grow by 200 bps to 5.3% by 2012, as free cash flow dramatically takes off and hits $3.7B. Given its liquidity, the company could even explore takeover activity, expanding scale through adding acreage.

Consensus estimates for EnCana's EPS forecast that it will grow 11.1% to $0.60 in 2012, decline by 70% in 2013, and then grow 111.1% in 2014. This may be a rocky ride, but near-term catalysts are likely to drive appreciation.

Canadian Natural is another oil & gas company that has meaningful potential for a good 2012 performance. Horizon is kicking into full production, possibly hitting 500K barrels per day. The nature of the play being involved in oil sands provides greater certainty over free cash flow. Management has shifted the focus away from increasing scale towards generating better returns.

Consensus estimates for Canadian Natural's EPS forecast that it will decline by 3.8% to $2.27 in FY2011, and then grow by 37% and 24.4% in the following two years. Modeling a 3-year CAGR of 17.9% for EPS and then discounting backwards by a WACC of 9%, yields a fair value figure of $48.74, implying 29% upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: We seek IR business with all of the firms in our coverage, but research covered in this note is independent and prospectively commissioned. The distributor of this research report is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence. Always discuss investments with a licensed professional before making any financial decision. Statements made within this report may include “forward-looking statements” as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.

Source: Significant Upside For EnCana, Canadian Natural