The December 2009 split into two companies was supposed to highlight the value of the U.S. and Canadian natural gas assets that EnCana (ECA) kept. (The new company Cenovus (CVE) got the Canadian oil sands and refining assets.) Instead it has wound up emphasizing EnCana’s exposure to a glut in North American natural gas that could keep prices depressed for years.
Now EnCana looks like it has decided to invest in reversing that 2009 split by putting about 20% of its capital budget into developing reserves that are rich in natural gas liquids and oil. EnCana believes that 2.1 million of the 11.7 million acres it has under lease have the potential for production that’s high in liquids.
But that decision is putting pressure on EnCana’s cash flow since the company has to generate the cash for capital spending from natural gas production when natural gas prices are depressed in order to develop these liquids rich reserves. (Low prices for natural gas hinder the company’s ability to raise cash by selling off natural gas assets and the price that it can charge joint venture partners.) The company’s 2011 capital budget of $4.6 billion to $4.8 billion does come in below cash flow, but that level of spending was projected by EnCana to increase production by just 5% to 7% in 2011. EnCana still has a huge number of acres under lease but there are North American energy companies with a more attractive mix of assets and with a quicker route to turning them into production and profits. I’d look elsewhere in the oil and gas sector for a pick.
As of January 13 I’ve dropped this stock from my long-term Jubak Picks portfolio http://jubakpicks.com/jubak-picks-50/ . For all of the annual changes to that portfolio for 2012 see my post http://jubakpicks.com/2012/01/13/10-stocks-for-10-years-2012-edition-my-annual-update-of-my-long-term-jubak-picks-50-portfolio/ )
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of EnCana as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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