EnCana Corporation (ECA) is a Calgary, Canada based company, engaging in the exploration for, development, production, transportation, and marketing of natural gas, oil, and natural gas liquids (NGLS). With all its reserves and production located in North America, ECA is one of the few Canadian companies that can compete with U.S. competitors in terms of size and capability. In 2009, ECA spun off its oil-producing assets and became a pure-play gas producer, which seemed to be a poor decision, given the extended low natural gas price. EnCana is now trying to pursue the strategy in early-stage oil plays to fight the low gas prices and increase cash flow.
Unusual Option Volume
ECA caught our attention Wednesday with its unusual put option activity. ECA had 5,622 put contract traded Wednesday, as compared to the average daily volume for the past month of 1,041, with the daily volume ratio of 5.4 as reported from Schaeffer's investment research. To investigate further, there was no major headline news on ECA other than the global growth concerns, reporting the trimming of 2012 world growth outlook from 3.5 to 3.3 percent by the IMF. So, we proceed to research into its fundamentals.
By looking into ECA's fundamentals, its EPS growth (3 year average) of -73.0 and operating margin, ttm, of -39.3%, as well as the negative ROE, ttm, of -11.5 are all below the industry average of -1.5, 20.7%, and 6.1. Below, we also compiled a chart to compare ECA's fundamentals with its peers.
EOG Resources (EOG)
Devon Energy (DVN)
Rev Growth (3 Yr Avg)
EPS Growth (3 Yr Avg)
Operating Margin % ttm
Net Margin % ttm
While it is hard to be optimistic for the oil & gas exploration and production (E&P) industry as a whole with the slowing of global economy, the situation does not look too bright for ECA with its weak fundamentals as compared to its peers.
Short Term Technical View
ECA closed at $21.62 with 0.60% loss on Wednesday, where the energy sector declined by -0.98%. Wednesday's trading volume of 3.81M for ECA is 21.3% less than the 30 day average volume of 4.84M. However, Wednesday's put volume increased by 4.4 times, as compared to the 30 day average put volume. From a technical perspective, the MACD (12, 26, 9) indicator had been showing a bearish sign since Sep 20, 2012 and ECA was currently trading below its 50-day MV of $22.18, as seen from the chart below.
Option Play Setup (Neutral Toward Bearish View)
Based on ECA's relatively weak fundamentals and short-term bearish trend, we are reviewing the following credit spread option play for traders who have a short-term neutral toward bearish view.
Short 1x Jan 19, 2013 Call with the strike price of $23 for $0.95 credit
Buy 1x Jan 19, 2013 Call with the strike price of $25 at the cost of $0.45
The maximum profit potential is $0.50, before all fees and expenses, and the maximum risk is $1.50 ($2 maximum loss - $0.50 premium received). The return on margin/risk is 33.33% for a period of almost 3 months. All the prices quoted are based on Oct 10, 2012's closing. However, for more conservative traders, it maybe safer to set up the position after Q3 earning release on Oct 24, 2012.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in ECA over the next 72 hours.