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Avinash Gandhi

ECA AT A GLANCE

P/E ► 17.4 AVG EV/EBITDA ► 7.29 AVG ROA ► 5.8% AVG ROE ► 9.5% AVG Debt to Equity ► 1.12 AVG Current Ratio ► 1.06 AVG Interest Coverage Ratio ► 5.26 AVG

 

 

 

 

 

 

EnCana is an independent Canadian oil and gas company with a diverse portfolio of international holdings; with over 12 trillion cubic feet of natural gas and 1.1 billion barrels of oil in its reserves^[1] (most of which are proven), EnCana sees a large part of its production on the North American continent. The company is also involved in a joint venture with ConocoPhillips in the Alberta oilsands, and has significant shares on projects in Qatar, Oman, France, Greenland, offshore Brazil and offshore Eastern Canada. Recently rising oil and gas prices have been highly beneficial to the company, as they raise profitability in an otherwise commodity-like market; on the flip side, high oil prices lead to increased production, and as the supply of oil and gas increases, prices will eventually fall. EnCana is also greatly affected by the Canadian-U.S. dollar exchange rate, as an appreciation of the U.S. dollar would increase the company's long-term debt while depreciation would decrease the value of the oil extracted relative to the price of drilling in Canada. Furthermore, the Government of Alberta recently raised royalties on operations in the Alberta oil sands, making the company's operations in the region less profitable. Still, with such large proved reserves, the company is in position to take advantage of near-term high-price conditions. EnCana's competition includes Anadarko Petroleum, Cabot Oil & Gas, Comstock Resources, and Apache.

Business Financials

EnCana's growth stagnated from 2005 to 2006, probably because oil and gas prices were lower in 2006 than in 2005. These conditions were probably also responsible for lower operating income between the two years, as constant costs combined with lower revenue to give lower profits.

On Sunday, May 11, 2008, ECA announced their plans to split the company into two parts - a pure-play natural gas company and a separate oil company.

Source: 2006 Annual Report^[2]

EnCana's properties contain an estimated 12.4 trillion cubic feet of natural gas reserves, 62% of which are proven. They also contain 1.1 billion barrels of liquids (oil, bitumen, NGLs), 75% of which are proven^[3].

Source: 2006 Annual Report^[4]

• Mmcf:: Million cubic feet
• bbl:: Barrels
• Mmcfe:: Million cubic feet equivalent

EnCana entered into the integrated oilsands sector in January of 2007, in conjunction with integrated oil major ConocoPhillips, with the stated intent to increase joint production from 50,000 bbls/d to 400,000 bbls/d by 2015 on the upstream side and from 60,000 bbls/d to 550,000 bbls/d on the refining side.

As of December 31st, 2006, EnCana also held significant interests in 1.7 million net acres off the east coast of Canada, half a million net acres offshore Brazil (including 10 deep and ultra-deepwater rigs, 9 of which are operated by Petrobras), 1.1 million net acres in Qatar, 4.3 million net acres in Oman, 1.5 million net acres in Greenland, and 859,000 gross acres in France's Aquitaine Basin^[5].

Trends and Forces

For EnCana, Oil and Gas Prices Determine Profitability

Oil and gas prices have fluctuated heavily over the past few years, though the most recent trend is a rise in prices, with a barrel of oil trading in international market a day after the new year at just over $100. Because both are nonrenewable forms of energy (they will eventually run out), slowing discoveries of new sources combined with increasing pricing has led to speculation that production is approaching peak oil quantities. Whether this is true or not, oil and gas are commodities: one company's gas can only be differentiated from another company's gas based on price. While EnCana currently benefits from high prices, the profitability of the current market will drive increased exploration and production, which could eventually cause prices to fall and margins to drop.

Alberta Government Regulation Reduce EnCana's Oilsands Profits

In October of 2007, the Government of Alberta announced that it would increase the total amount of royalties paid by companies developing Alberta's oilsands by 20% - about 1.4 billion Canadian dollars. Oil companies like EnCana will see drops in net profitability come 2009, when the law takes effect, though it should be noted that industry efforts to lobby the tax away were mildly successful - most Albertans favored a much higher tax^[6].

Fluctuating Exchange Rates Affect EnCana's Financials

Though many of EnCana's expenditures occur in Canada, and therefore use Canadian dollars, the worldwide price of oil is recorded in U.S. dollars. If the Canadian dollar appreciates relative to the U.S. dollar, the value of the oil that is extracted in Canada would decline because it would be sold in a less valuable currency relative to Canadian dollars. Furthermore, much of EnCana's long-term debt is held in U.S. dollars, meaning that an appreciation of the U.S. dollar would increase EnCana's relative debt, as the company would have to turn more Canadian dollars into U.S. dollars to pay it off. Thus, the depreciation of the U.S. dollar hurts the company in the short term and the appreciation of the U.S. dollar hurts the company in the long term.

A Renewable Future Means Long-Term Decline for Fossil Fuels...and EnCana

Fossil fuels, though highly cost-efficient forms of energy, are heavy polluters when burned. Increasing environmental concern over environmental degradation and global climate change is fueling a consumer-driven push away from dirty forms of energy toward cleaner forms like wind, solar, biofuels, and/or nuclear, especially in developed, politically-progressive regions like Europe, where renewables are catching on. This could lead to a long-term decrease in the demand for oil and gas. In emerging markets like China and India, however, the drive for economic growth supersedes environmental concerns, and oil and gas are still cheaper than solar. Since emerging markets are where most of the future opportunities in the global economy lay, EnCana and other oil and gas companies could continue to grow despite growth in the renewables sector.

Competition

EnCana's main competitors lie in the independent oil and gas sector, since the major oil companies like Exxon Mobil and BP are too large and diverse to fairly be called "competition". Among EnCana's independent competitors are Anadarko Petroleum, Cabot Oil & Gas, Comstock Resources, and Apache. Anadarko Petroleum is by far the largest of EnCana's competitors; though it only produces about half the gas EnCana does, Anadarko produces nearly 65,000 more barrels of oil per day. Comstock Resources is the smallest of EnCana's competitors, and is also betting on deep water exploration to deliver in the future. Apache's strategy is a unique one; the company buys up "mature" properties from oil majors and then extracts more from them, taking advantage of the high price level to keep margins up despite the use of expensive technology. Cabot Oil & Gas is the most similar to EnCana, though much smaller, as the company is heavily invested in natural gas (with only 3% of its reserves containing liquids^[7]). Cabot, however, has moved out of the offshore sector and is focusing on developing onshore North America.

Notes

1. ↑ http://www.encana.com/wcm/groups/internet/@p_www-ir/documents/web_content/p004460.pdf
2. ↑ http://www.encana.com/wcm/groups/internet/@p_www-ir/documents/web_content/p004460.pdf
3. ↑ http://www.encana.com/wcm/groups/internet/@p_www-ir/documents/web_content/p004460.pdf
4. ↑ http://www.encana.com/wcm/groups/internet/@p_www-ir/documents/web_content/p004460.pdf
5. ↑ http://www.encana.com/wcm/groups/internet/@p_www-ir/documents/web_content/p004460.pdf
6. ↑ http://en.epochtimes.com/news/7-10-26/61223.html
7. ↑ Reuters, Cabot Oil & Gas Corp, http://stocks.us.reuters.com/stocks/fullDescription.asp?rpc=66&symbol=COG