Encana Corporation (NYSE:ECA) has been losing its share price over the past five months only due to the significant fall in oil prices. Encana's share price dropped more than 15% in the last 5 days alone with the fall of WTI crude to $69 per barrel. Due to the fall in oil prices, Encana is losing more than 30% of its cash generating potential. In, addition, the company has been aggressively moving its portfolio towards oil and liquid plays and looking to generate 75% of cash flows from these businesses in 2015. Amid falling oil prices, Encana CEO Doug Suttles is poised to ramp-up growth activities and double the rig numbers in the Permian basin, when others are lowering their capital investment plans. The CEO is expecting oil prices to bounce back in the following quarters and calls the recent plunge "annoying... not threatening."
I have a similar opinion that oil prices have the potential to bounce back in the following quarters. I believe that business activities all around the world will strengthen in the coming days which will result in an increased demand for oil. IMF has also predicted that the global economy will grow at 3.8% in 2015 compared to 3.3% in this year. In spite of lower prices, Encana's recent restructuring efforts and massive growth in production, as well as its healthy cash position, will allow it to face headwinds. RBC Capital analysts say that Encana has potential to nearly double in 2015 on the back of its restructuring plan, including 20% workforce reduction and spinning off its Alberta land holdings.
Let's take a brief look at the company's strategic plans, business performance and financial situation to gauge its potential to face head winds.
Encana Corporation is among exploration & production companies that have been moving their cash flow and revenue generation towards oil and liquid plays. Encana is successfully moving its asset portfolio from natural gas to oil and liquid plays. With efficient managerial skills, smart capital allocation strategy, and focus on creating value from assets, Encana has already reached its strategic plan of generating 50% of cash flow from upstream businesses. The massive and speedy growth in oil and liquid production is the results of Eagle Ford assets along with improved production from its original five growth assets including the Montney, San Juan Basin, Duvernay, Tuscaloosa Marine Shale plays, and DJ Basin.
In the most recent quarter, the company has demonstrated its growth potential by generating 70% increase in liquid production from its original five assets. In addition, Encana's recently acquired Eagle Ford position added 37,600 bbls/day to its overall liquid production in the past quarter. It has increased oil production by 128% and natural gas liquid production by 35% on a year-over-year basis. Furthermore, Encana's management is planning to increase its upstream cash flow to 75% of overall operating cash flow in 2015. Therefore, it is accelerating the integration of Athlon Energy, which was recently acquired for $5.9B. This acquisition has provided Encana a premier oil position in the Permian Basin.
With the efficient managerial skills, smart capital allocation strategy, and focus on creating value from assets, Encana has doubled its profits in the past quarter, and cash flow also climbed by 22%. Its cash flow generating potential has been improving over the past few quarters, due to the move towards liquid assets and improvement in level of production. Year to date, it has generated $2.4B in operating cash flows, when capital requirements were standing at $1.69B. It has acquired around $3B of assets, proceeds from divestitures were at $4.3B, and there were $2.1B in proceeds from sale of investment in PrairieSky. At the end of the latest quarter, Encana had around $7 billion of cash and cash equivalents which I believe are enough to fund the Athlon Energy acquisition. Moreover, it has around $4.1B billion of undrawn bank lines signifying considerable financial flexibility.
With the significant drop in its share price, Encana is trading at significant discount trading at only 4 times to earnings. Even the oil prices dropped significantly, I believe that the company has potential to offset the impact with a massive increase in production. It is also in a very healthy cash position with $7B of cash and cash equivalents and $4.1B billion of undrawn bank lines. I'm seeing the latest fall of 15% in its share price as a buying opportunity and I believe that the company has upside potential on the back of expected increase in production with the integration of acquisitions.
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