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At Encana, there is another (core area)

Also: why one U.S. hedge fund manager thinks WTI is headed down (and Brent isn't)

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

May 7, 2014

by Max Fawcett

Encana has spent the last 18 months shedding assets, but today it announced a key addition. It’s reached an agreement to buy 45,500 acres worth of property from Freeport McMoRan for approximately US$3.1 billion. The lands, which are in the Eagle Ford play, are rich with oil and natural gas liquids, a marked shift from Encana’s traditional focus. That’s by design, of course, and CEO Doug Settles says this new acquisition will be the company’s sixth so-called key play, in addition to the five he highlighted in a November conference call. The question, of course, is whether Encana, a company that’s gained a reputation for moving in the wrong direction at precisely the wrong time, is making another strategic miscalculation. It’s a big bet, too, given that the deal will effectively double the company’s oil and liquids production.

And if one hedge fund manager is right, it’s a bet that’s going to go against Encana in the near term, at least as far as the price of the commodity they’re betting on is concerned. As the Globe and Mail’s Scott Barlow reported this morning, a recent gathering of American hedge fund heavies produced a notably bearish call on WTI from PointState Capital’s Zach Schreiber, a manager who might be worth listening to. “Mr. Schreiber has an impressive CV as a protégé of ‘market wizard’ Stanley Druckenmiller,” Barlow writes, “who in turn learned the hedge-fund ropes from George Soros. His thesis on crude is relatively straightforward – over-production in the U.S. will create the same plunge in the commodity price that happened previously with natural gas.”

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That said, his is largely a short-term call on WTI – not necessarily great news for Encana and other Canadian producers if it comes true, but hardly existential either. Barlow’s takeaway? “In the next eighteen months or so, investors should emphasize stocks selling more crude into global markets at the Brent price, as opposed to North American–focused companies.” That means companies like Bankers Petroleum (TSE:BNK), Talisman Energy (TSE:TSM) and Vermilion Energy (TSE:VET).

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