One Good Idea: Buy EnCana shares

Stock puts long-term capital growth, enduring revenue stream in your pocket

By Dianne Maley
Globe Investor Magazine online, October 09, 2008

Source: Pat McKeough, portfolio manager and publisher of The Successful Investor newsletter.

The idea: Buy shares of beaten-down natural gas and oil giant EnCana Corp. for long-term growth and capital appreciation. Mr. McKeough first recommended EnCana last January, when it was trading in the mid-$60s. The stock shot up to the high $90s before crashing through $50 in September selloff. It now trades around $52.

What distinguishes EnCana from its rivals is its focus on developing long-life, unconventional oil and gas reserves that will pay off over the long term, Mr. McKeough says. One example is the Amoruso gas field in Texas, which the company says is one of the fastest-growing and highest-potential natural gas fields in North America. EnCana's 25 million acres of developed lands, with 19 billion cubic feet of proven reserves, provide 10 years of drilling opportunities in most of the major and emerging producing basins in North America.

By investing heavily in resource plays today, EnCana is ensuring its position as a leader in natural gas production for years to come. "Those costs are going to generate long-term cash flow," Mr. McKeough notes.

The company is a leader in using steam-assisted gravity drainage in its oil sands projects, and strives to find the most effective technology to increase the amount of gas it recovers.

EnCana plans to split in two early next year, with the natural gas assets keeping the EnCana name and the oil sands development arm - which EnCana refers to as an integrated oil company, complete with refining - being called Cenovus Energy Inc. Investors will then have two "pure plays," with each company pursuing the best strategy for its business.

This division alone could give the stock price a boost, Mr. McKeough says. "When that happens, the two parts are generally worth more than the whole," he said in an interview.

The payoff: Long-term growth in cash flow and share price, thanks to the company's heavy investment in developing new North American resource plays. The company has doubled its dividend for two years in a row and is yielding about 3 per cent.

The big risk: The price of natural gas could go into a lasting slump, hurting all gas companies - which Mr. McKeough considers unlikely. Or the company could fail for some reason to break in two, causing the stock price to languish.

Why listen to Pat McKeough? Mr. McKeough's 40 years of experience and his conservative, growth approach to portfolio building have stood his readers well over the years. He doesn't try to time the market, preferring instead to invest in high-quality stocks spread across the five main sectors - manufacturing and industry, resources and commodities, utilities, finance, and consumer goods and services.

The Successful Investor newsletter was rated No. 1 among Canadian newsletters in 2007 by the Hulbert Financial Digest.

Special to The Globe and Mail