When it comes to timing, we can all agree that it is very difficult to perfectly time the direction of commodity prices and the magnitude of the moves. So, we can all cut companies some slack when decisions that are based on commodity prices go bad.
Encana Corporation (TSX:ECA)(NYSE:ECA), however, is the extreme of this scenario. Having exited oil in the early 2000s, shifting to natural gas when natural gas was trading at highs, Encana sold its oil assets at the trough of market. Then in 2012 the company shed natural gas assets for oil when oil was trading at highs, meaning that once again, the company sold at the trough of one market and bought at the highs of the other market.
In short, the company sold its natural gas assets at the trough of the market and overpaid for its oil assets. Clearly, this does not inspire investor confidence.
Earlier this week, Encana presented at a conference and discussed its strategy and plans going forward. The company has pointed out the progress they have made over the last 18 months in diversifying production mix and streamlining operations.
Encana expects to reduce net debt by approximately $2 billion in 2015, and expects a fully funded 2015 capital program and dividends while growing production. The $1.8 billion in proceeds from the sale of Haynesville, along with other divestments, will support this strengthening of the balance sheet.
For the month of August, production at its key resource plays was quite impressive. The Permian saw a 26% increase over second-quarter production, Eagle Ford achieved a 25% increase in production, Duvernay achieved a 62% increase in production, and Montney achieved a 7% increase in production.
Notwithstanding these facts, however, oil production only accounts for 16% of total production (as of the second quarter of 2015), while natural gas accounts for the remainder. So, natural gas has still been the most important commodity to the company.
The sale of Haynesville will move the needle towards oil, but maybe Encana will continue to make the wrong bets at the wrong points in the market, and maybe selling its natural gas assets to focus on oil is a sign of a bottom for the natural gas market.
I have not done the calculation, but the amount of money that has been lost due to selling assets at lows and buying assets at highs is probably staggering. Whether the stock price reflects this is a difficult question. But the comfort in knowing that a management team has the foresight to make prudent and good decisions that drive long-term value for the company and its stakeholders is priceless.
Unfortunately, Encana has done just the opposite.
