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| Brought to you by The Oxford Club | Monday, August 1, 2016 |
The Natural Gas Producer That Could Grow 10% in the Next 16 Months
 The team at Energy & Resources Digest has been all over the excellent prospects in natural gas. Dave Fessler told you how natural gas is usurping coal's place as the top choice for power generation. His pick: pipeline company Western Gas Partners (NYSE: WES).
Well, after returning from another site visit in Mexico - where natural gas consumption is swiftly ticking upward - I really want to join this party.
According to S&P Global Platts analytics, America's natural gas exports to Mexico are up 35% to 3.5 billion cubic feet a day. Why? Because business is booming south of the border.
Mexico's economy expanded 2.6% in the first quarter, beating forecasts for the third time in four quarters. All that economic activity means Mexico needs electricity (and natural gas) to keep the lights on.
And it'll only need more juice...
The International Monetary Fund just raised its forecast for Mexico's GDP growth to 2.5% in 2016 and 2.7% in 2017.
Strong demand for American natural gas isn't limited to south of the border either.
Natural gas-fired electricity generation should hit a record level in the U.S. this year, up 4% from last year. In 2000, natural gas powered around 15% of U.S. electricity. This year, the Energy Information Administration expects natural gas to power 34% of U.S. electricity.
The Glut Gets Smaller
Mind you, there is a glut of natural gas. The amount of natural gas in storage in the U.S. is higher than the five-year average. But the glut keeps shrinking. That's pretty bullish.
In fact, my colleague Matthew Carr says it could lead to natural gas trading in the $3 range... possibly even $4.
The price action is already strong. Natural gas was recently up 19% from where it was at the start of the year and 69% from its low in early March.
We seem to be at or near the bottom of a cycle. Those companies that are positioned well can make a bloody fortune. And that brings me to my natural gas pick, Encana Corp. (NYSE: ECA).
Encana is one of the largest natural gas producers in North America. Its production stream is about 70% natural gas, though it is focusing more on natural gas liquids and petroleum. I'll talk more about that in a bit.
Encana is headquartered in Calgary, Alberta, Canada. It produces natural gas, natural gas liquids and petroleum from four areas: the Montney region of Northern Alberta and British Columbia, the Duvernay in west-central Alberta, and the Eagle Ford and Permian in Texas.
The company owned more properties but sold off a bunch of noncore assets. Now Encana is concentrating on these four areas.
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Bad News and Good News
Here's what catches my attention: There was a lot in its recent quarterly report that looked bad on the surface but was actually quite good.
For example, quarterly natural gas production declined approximately 10% year over year to 1.418 billion cubic feet per day.
That said, Encana's production of oil and natural gas liquids rose 4% year over year to 132,000 barrels per day.
Its decision to concentrate on those four core areas seems to be working out well. For instance, Encana's properties in the Permian Basin added 5 million barrels of oil equivalent per day over the last quarter. That has more than offset flat results in South Texas' Eagle Ford.
Encana also reported a net loss for the quarter. But the net loss shrank to $601 million, or $0.71 per share, versus $1.6 billion in the same period last year.
On an operating basis, Encana earned $89 million, or $0.10 per share. That blew away analyst estimates of an $0.08-per-share loss.
In the earnings call, Encana CEO Doug Suttles said, "Compared to the second quarter of last year, our operating costs are down 32%, our administrative costs are down 27%, transportation and processing costs are down 18%. And our well costs are down 30% to 40% compared to 2015 averages, and our debt is lower."
Another way the company beat earnings was by adding in $467 million it recovered due to a change in Alberta's income tax rules. So it's doubtful this income tax recovery will happen again. But the company is cutting costs and improving its bottom line even without that.
Encana expects to sell more noncore assets this year. The money it is raising is being put to good use. Part of it will pay down debt. The rest will go toward helping Encana do what it does best... drill, baby, drill!
In fact, the company could add 9% to 10% of incremental production growth next year.
Encana raised its capital expenditure guidance by $200 million to more than $1 billion this year. Most of that money will be spent later in the year.
So, despite some hiccups, Encana is well-poised to play the natural gas boom.
You can see that Encana has pushed above a longer-term downtrend. Now it is trying to push above a second line of overhead price resistance.
If it breaks out successfully, my target on Encana's stock is $15.75. That's nearly a double from recent prices.
Natural gas seems to be heating up. Demand is rising in the U.S. and Mexico. And I believe Encana is a great way to play it.
Good investing,
Sean The Last Great Source of Income...
Dividends are just about the last source of investment income left in America.
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