With the oil cycle improving and all the good acreage already owned, companies have to buy companies to boost reserves.

Encana has those reserves and is very undervalued compared to their potential.


ECA - Encana Corp - Company Profile

Encana Corporation, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States. The company owns interests in various assets, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; and other upstream operations, including Wheatland in southern Alberta, Horn River in northeast British Columbia, and Deep Panuke located offshore Nova Scotia. It also holds interests in assets that comprise the Eagle Ford in south Texas; Permian in west Texas; San Juan in northwest New Mexico; Piceance in northwest Colorado; and Tuscaloosa Marine Shale in east Louisiana and west Mississippi. Company description from FinViz.com.

Encana reported earnings of 11 cents that beat estimates for 4 cents. Revenue of $1.297 billion also beat estimates for $789 million. Production declined 18% due to low prices and depletion. This was an excellent report from a beaten down energy stock.

Production averaged 237,100 Boepd. Drilling and completion costs declined by 30%. They reduced long-term debt by $1.1 billion and net debt by 50%. They replaced 326% of production.

They currently have more than 10,000 premium drilling locations and expect to grow that number in 2017. Since December 31st, they have added more than 50 premium locations in the Eagle Ford alone. They ended 2016 with a whopping $5.3 billion in liquidity and cash of nearly $1 billion. They expect to spend $1.6 to $1.8 billion on capex in 2017 and grow liquids production by 35%. Capex willbe funded by cash on hand. Proved reserves were 920 million barrels and 3P reserves were 2.372 billion barrels.

With the cash, production rates, reserves and drilling inventory listed above they are definitely an acquisition candidate with only a $10 billion market cap. Half their market cap is cash on hand.

JP Morgan initiated coverage with an overweight rating and $16 price target.

Earnings August 1st.

I am recommending two positions for Encana. I am recommending a January $12 call for $1.40 and a January 2019 $15 call, also $1.40. The short-term position is to capture the expected summer rebound in oil prices. The long-term position is acquisition insurance. It will capture any normal rise in price but also any acquisition announcement.

Oil prices typically peak in August and then decline into fall. If OPEC announces this week an extended production cut scenario through March 2018 as expected, prices could continue to rise into winter as global inventories decline.

Buy Jan 2018 $12 call, currently $1.40, no initial stop loss.
Buy Jan 2019 $15 call, currently $1.40, no initial stop loss.


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