With 30% of its total production being oil, almost 24% liquids, and 45% natural gas, Encana (TSX:ECA)(NYSE:ECA) is a nicely diversified energy stock. This serves the company and the stock well in an environment where investors remain skittish about the Canadian energy sector.
Encana’s stock price rose 16.7% in December on the heels of strengthening oil and gas prices as well as Encana’s “rebranding” of its shares and a strong third-quarter results.
Oil prices rally in December and the Canadian natural gas market gets some good news
Oil prices rallied in December, with the West Texas Intermediate (WTI) oil price up 12% and the Western Canadian Select (WCS) oil price up 25%. And while natural gas prices did not rally in December, there have been positive developments in Canada with regard to the LNG industry and with regard to access.
In December, TC Energy reduced long-term tolls by 20% on its pipelines that transport Western Canadian gas to the Toronto and U.S. Midwest markets. All of this pumped up oil and gas stock prices like Encana’s stock price, which rallied 16.7% in December.
Encana becomes Ovintiv
Upon Encana’s announcement in October that the company’s corporate domicile would move to the United States and its name would be changed to Ovintiv, Encana’s stock price rallied. The plan (or hope) is that with this change, the company will be “exposed to increasingly larger pools of investment in U.S. index funds and passively managed accounts as well as align better with U.S. peers.
This was a drastic, seemingly odd decision that confused the markets, but it was in response to a challenging situation in the Canadian oil and gas industry.
Solid third-quarter results
With Encana delivering solid financial results today, even with continued record low natural gas prices, we can have strong confidence in the company and its business. Encana is focused on three core growth assets that are all free cash flow positive, as the company is ensuring that costs are falling dramatically and efficiencies are rising impressively.
Costs continue to fall at Encana, cash flow growth remains strong, and Encana stock is trading at ridiculously low valuations of below two times cash flow — all while delivering a modest dividend yield of 1.56%.
Foolish bottom line
Encana still trades at unreasonably low valuations, as it continues to reflect the suffocating challenges in the Canadian oil and gas industry, and this valuation is reason enough for the stock to rally. But Encana has other fundamentally sound qualities, like exposure to some of the highest-quality resource plays, such as positions in the heart of the Permian and Anadarko basins, and in the Montney.
At this point, I expect the stock to continue to rally, as the risk in buying Encana stock has greatly diminished due to ridiculously low valuation levels, and the potential return has greatly increased.
In closing, I would like to remind Foolish investors of our belief in holding great businesses for the long term. While this belief remains intact, we are also aware that sometimes, short-term stock price movements create opportunities to create wealth. By blending this long-term focus with a keen eye for short-term stock mispricings, we can use both strategies in harmony, and our quest for financial freedom can be fulfilled.
