Encana Upgraded to Outperform - Analyst Blog

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On Jul 09, 2013, we upgraded Canadian natural gas producer Encana Corp. (ECA) to Outperform from Neutral.

Why the Upgrade?

Encana has one of the largest natural gas resource portfolios in North America, which provides a diverse/high quality inventory of reserves. We see a solid long-term future for the company as demand for natural gas soars, spurred by its cost effectiveness and abundant supply in North America. A prudent asset disposition strategy and an ever-increasing share of liquids production are other positives in the Encana story.

Detailed Analysis

Calgary, Alberta-based Encana – one of North America's largest producers of natural gas along with the likes of Exxon Mobil Corp. (XOM) and Chesapeake Energy Corp. (CHK) – was an early mover in areas like the Horn River Basin in northeastern British Columbia and the Haynesville shale in Texas and Louisiana. It has amassed formidable land positions in both of those emerging regions and others. The company hopes to take advantage of the lower-than-average reserve decline rates and low-risk drilling opportunities that have characterized unconventional resource development across the industry in recent years.

We remain highly optimistic regarding the collaboration of Encana and Mitsubishi in developing the Cutbank Ridge, which is one of the most fertile and low-cost resource rich acreages in North America. With large proved undeveloped natural gas reserve, the region is expected to have the capacity of delivering long-term, affordable energy supplies to domestic and overseas markets.

We appreciate Encana's strategy of disposing assets that do not fit into its long-term growth plan. The company's divesture program includes the disposition of high cost yet low profit generating assets and a focus on asset base expansion that would render high returns. The ! net proceeds received from these property sales (more than $1.5 billion in 2011 and over $4 billion in 2012) also render a strong financial flexibility to the company.

Other Stocks That Warrant a Look

In addition to Encana, one can look at W&T Offshore Inc. (WTI) as a good buying opportunity. This North American upstream energy operator – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.