Buy Encana On Maximum Pessimism

Jun. 22, 2017 2:58 AM ETOvintiv Inc. (OVV), OVV:CA19 Comments

Summary

  • Encana is beaten up on oil pessimism and is trading near book value.
  • Encana's core drilling locations include an up to 12,000 well position in the Permian Basin.
  • Encana also has a significant position in Canada's largest natural gas formation the Montney which is liquids rich.
  • Buy Encana before oil inventory starts to come down on expected or unexpected circumstances.

The narrative in the oil and gas markets is "lower for even longer." I think that narrative is driven with a backwards view of the oil and gas markets, not a forward looking one. Those jumping on the downtrend now are short-term traders who think they can somehow outmaneuver supercomputers, hedge funds, prop traders and the traders who were in on the trade early. No, late comers to the downtrend in oil and gas stocks will get run over soon - just like every other late comer to an almost every other fundamentally questionable trend.

As I have been touching upon, I don't believe the hype of lower for even longer on oil. OPEC production cuts, over estimation of what shale can really do and the very real likelihood of intermediate term oil supply disruptions in the Middle East tell me that now is the time to fire with effect and buy oil stocks. Energy companies with solid financials, assets in the Permian Basin, natural gas assets to develop over time and a management that understands oil's future is no longer long-term, are the companies to invest in. Encana is one such company.

Throw the Book at Encana

Encana (ECA) is an independent oil and gas producer formed in 2002 from the merger of PanCanadian Energy Corp and Alberta Energy Company. The most interesting part of its early history was a brush with Enron (yep, that Enron) as part of a round-trip trading scandal. Today, through a long series of transactions, culminating in a transformative acquisition of Permian Basin assets in 2014, the company operates in what it calls its "Core Four" assets.

Financially, the company has undergone a major transformation the past several years. Management has sold assets to bring its total liabilities down to $8.17b ( just under $4.2b debt and $4b obligations) from 14.85b to

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