Buy low and sell high, or buy high and sell low?
The answer appears obvious, but many investors prefer the latter when energy investing. They prefer to buy at the top and sell at the bottom.
Billions of dollars were lost when investors piled into energy during the price peak a few years ago. Master limited partnerships (MLPs) investors lost more than most. The niche — once the darling of income investors — is littered with the remnants of bankrupt producers.
Smart investors understand the energy cycles; savvy investors exploit them. Savvy investors know to buy low and sell high.
Calgary-based Encana Corp. (NYSE: ECA), an onshore oil and gas producer, is a savvy choice. It’s poised to recover as the energy cycle swings up. Encana is poised to recover better than most.
Price is relative to value. Relative to where Encana shares traded at a decade ago, they’re a bargain today. You can buy Encana shares at an 85% discount to their all-time high.
Encana has worked on fortifying the business during the downdraft in energy. The company, formed by the 2002 merger of PanCanadian Energy Corp. and Albert Energy Corp., lifted Encana into the upper echelons of North American onshore oil and gas producers.
Encana management was unsatisfied, though. A sprawl had emerged post-merger.
The company split in 2009. Encana would focus on U.S. and Canadian oil and natural gas production. The spin-off, Cenovus Energy (NYSE: CVE), would focus on Canadian oil sands and U.S. oil refining.
Encana has continually shed superfluous operations since. The asset side of the balance has been honed, while the liability side has been fortified.
Total debt has been reduced by $3 billion since year-end 2014. Leverage ratios continue to drop, with debt to equity down to 67% today from 150% to start 2014.
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The drive toward efficiency has yet been completed. Production efficiency will be driven by four primary basins. Encana will allocate 95% of its capital to its Permian, Eagle Ford, Duvernay, and Montney properties. These are higher-growth, higher-margin, unconventional plays. These regions are the focus. These regions will enable Encana to achieve its five-year plan.
With oil prices hovering at $56/barrel, present financial performance portends better days ahead.
Recent gains in revenue and earnings growth give reason for optimism. Management projections for cash and margins further brighten the outlook.
Management says that it expects to increase cash 25% over the next five years, Cumulative free cash through 2022 will total $1.5 billion if oil stays above $50/barrel.
Profit margin per barrel should expand to $16 compared with $11 today,
More cash flowing into the company coffers will mean more cash flowing out to investors. The dividend, though spartan at the moment, should rise in tandem with cash flow.
Encana’s transformation has positioned the company to benefit from a recovery in oil and natural gas prices. It has also positioned the company to make money at current market prices, and to make money should oil and gas prices trend lower.
It has a taken a few years since the separation from Cenovus, but Encana is finally firing on all cylinders. It has proven that it can create value at lower oil and natural gas prices.
Many investors have yet to get the memo. This is evinced by Encana’s stock price, which is still flat since it unveiled its bold five-year plan last fall. The shares have languished for most of 2017.
Don’t expect the shares to languish in perpetuity. Since the exceptional quarterly earnings report, the shares are up 25% (albeit from a depressed low). It’s only a matter of time before more investors realize Encana’s potential and give management the credit it deserves for driving efficiency that enables the company to prosper at lower energy prices.
Encana stock is unlikely to trade in the low $90s like a decade ago. But with the shares priced at an 85% discount, they don’t need to return to the low $90s for investors to book a healthy profit. A return to the low $20s would be healthy enough.
Thanks to superior management, lower energy prices have made Encana stronger. Higher energy prices, in turn, will make Encana investors wealthier.