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Is Encana ready to run?

Why one analyst thinks that the beleaguered natural gas producer may be on the verge of better days

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

Sep 13, 2013

by Max Fawcett

It wasn’t that long ago that Encana (TSE:ECA) was one of this province’s most important companies, an integrated powerhouse that made its presence felt across Canada and throughout North America. That changed when it decided to hive off its oil assets, spin them out into Cenovus Energy and become a pure play natural gas company right as that commodity was tanking. But according to a pair of recent notes from AltaCorp Capital’s Dirk Lever, the company may be about to turn a corner.

In a corporate presentation delivered last week, new CEO Doug Suttles hinted at the company’s direction going forward. It hinges both on a greater emphasis on liquids-rich and oily targets and the so-called “Encana advantage” – the company’s ability to effectively manage large and technically complicated projects in capital-intensive plays. “The perspective of those involved in the review process is that as the plays get more complex and larger, the Encana advantage (technical and operational) gets greater, and not by a small margin, but a wide margin according to benchmarks completed,” Lever wrote. “The final strategy, due November/December, will dictate the 2014 budget, revise the corporate structure and shape dividend policy. Ultimately, Encana wants to optimize its capital allocation process in order to maximize economic gain for its investors by going after those projects that offer the best upside potential. Value creation will trump all, and it will do this in a focused manner.” Lever has a $25 target on Encana shares, which is a 50 per cent premium on where they’re trading today.

Niko Resources (TSE:NKO) on the other hand, is a natural gas producer that’s going in the other direction. Its shares have been absolutely torched since late June, when it became clear that funding was going to be a major problem for the company. According to FirstEnergy’s Darren Engels, that’s still the case. “At September 30, 2013, we estimate Niko’s cash balance at US$53 million. With the inclusion of cash flow from operations until the end of the fiscal year, March 31, 2014, and the noted capital expenditures, we estimate that Niko’s cash balance could potentially be less than US$10 million at March 31, 2014.” That’s a problem on its own, but it’s particularly worrisome given that the company published a material change report last week that said the US$60 million loan it secured in July is contingent upon the company having a minimum cash balance of US$10 million at the end of each fiscal quarter. If it breaches that covenant, the recent selling may look modest by comparison. FirstEnergy currently has a $3 price target on its shares, a substantial discount to the $4 and change they’re trading hands at today.


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