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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Mattyice who wrote (48218)	6/2/2012 7:17:50 PM
From: E_K_S	3 Recommendations Read Replies (1) \| Respond to of 78751

Hi Matt ECA is a pretty good pick w/ a lot of the pieces to make a well integrated NG E&P and distribution company. I still think it is priced a bit high based on my valuation criteria but I have this one on my watch list for a tracking buy position. -------------------------------------------- Re: Encana Corporation (ECA) -NYSE - My initial Buy Target Price $15.50/share Here are a few of my value ideas for ECA at least those that caught my eye. I like the general theme of buying into a proposition (ie Natural Gas) that is out of favor, historically selling at or near the lowest price in 10 years and where the company has built their business plan around AND continues to make money. Next, I want to be sure the company has a solid core set of assets that are well capitalized through strong consistent FCF and/or use of low leveraged LT debt. For this I check a few things. (1) Current Annual Income/ total Long Term Debt = 15.34 Net Income Avl to Common (ttm): .501 B Total Debt (mrq): 7.670 B This measure is a bit high for me as I want a number of 4 or less (2) Look at BV and TBV BV = $11.51 TBV = $ 9.17 (Note: BV reported on ADFV Web site shows a higher number that may not reflect a split) The stock is still selling at a premium to both BV & TBV. 1.67x BV & 2.09x TBV (3) Earnings and PE have been impacted by low NG prices but are still positive. Trailing Annual EPS were $0.59/share or 32 PE and 2012 est avg $0.85/share or 22.55 PE. PE's are falling as EPS increase but they are still high when compared to the large diversified integrated oil companies. I would compare ECA to an integrated NG utility and/or NG/oil pipeline storage company or MLP which demand a higher PE. MDU & KMI come to mind but neither really has the exposure to the NG E&P like ECA. The take away for me is the company is still profitable w/ historically low NG prices and with appropriate forward hedges and management, EPS have increased YoY. (4) Cash flow/Share = $4.42 and Cash/share $3.25/share. Dividend yield 4.02% ($0.80/share per year and currently not covered from current earnings) (5) I look at their core Assets: From their company presentation May 23, 2012 - UBS Global Oil and Gas Conference encana.com Leading North American Resource Play USA Division : Potential Liquids Play High Quality Asset Base Tremendous Resource Potential ------------------------------------------------------------------------------------------------------------------------------- (6) I want to find some new angle that the company is pursuing that could grow significantly and eventually be large enough (as a % of total market cap) to move the stock price higher. For me, GLW has done this w/ LED displays in the 90's, diesel filters in the 2000 and bio-engineering in the 2010. Dupont did this in the 2000's w/ solar cell panels in a JV w/ China and their AG division expansion in late 90's and 2000's to compete w/ Monsanto. Encana has two Natural Gas ventures w/ over $1.5B committed in (a) LNG terminal port and (b) LNG fueling stations. The Kitmat LNG Project LNG Fueling Projects ============================================================ Conclusion: While not in the "Value" Buy zone for me (yet), ECA owns some very interesting integrated Natural Gas assets that generate significant cash flows to remain profitable even though NG is selling at 10 year low prices. There are arguments that NG is a disruptive fuel in the US replacing coal use at US utilities and even nuclear utility plants in Japan. ECA has a long term vision to build the necessary infrastructure to find, process, store and distribute Natural Gas. Many of those investments have already been made in securing land (and drilling leases) in the U.S. and Canada. For valuing the company as a possible "Value" buy for me, I might look at buying at a 17 PE similar to the high end range I pay for Utilities and Pipeline companies. That would make my first buy target @ $15.50/share. I would also like to see the dividend yield to remain above 4% as EPS rise hopefully above $1.00/share. This could occur if ECA can increase their margins for each of their value added services as they build out their distribution infrastructure including NG storage, their LNG port terminal facility and their land based fueling stations. I am very bullish long term on NG and if ECA builds their market into JAPAN replacing their nuclear electric utilities with LNG delivered from the Western Canada facility it will be a real winner for ECA and the environment. EKS