Gas Up With ECA

Given that gas represents 80% of total production for this company, this should prove especially important; beyond that period, the greater uncertainty in Russian gas production should validate EnCana's investment today in new natural gas production efforts, including in an offshore project off the coast of Nova Scotia. In particular, EnCana is expecting its natural gas production in 2008 to increase by 6% to 3.8 billion cubic feet per day while oil and natural gas liquids production is expected to decline slightly by 1%.

No matter what actually transpires in global oil and gas production, I believe it makes sense to invest in a company like EnCana, which, aside from its projects in oil and LNG, has one of the largest proven reserve bases of natural gas among Canadian companies, at 13.3 trillion cubic feet. Concurrently, the costs of these reserves have declined by 17% over 2007 to $1.65/Mcf.

EnCana also plays to some extent on crude oil -- 2007 reserve additions to crude oil reserve additions increased by 17%, while natural gas reserve additions increased by 5%.

The earnings picture for this company, based on 2007 results, shows coherent developments in both upstream and integrated oil income streams. The analogous figures for Petro-Canada show a much more troubled picture. The strong inventory growth for EnCana will also bode well if there are any disturbances to stocks in the future. (Of this overall inventory growth, integrated oil inventories increased by 121%, indicating sizable reserves both in upstream and downstream.)

EnCana's operating margins are much higher than Petro-Canada's, despite a greater increase in the price of purchased products. The only problem that I can see is in the substantial growth EnCana projects for its future asset retirement obligations. (The earnings growth for Petro-Canada, despite poor results in both of its principal segments, is due to relative cost containment combined with non-recurring income tax provisions revenue.)

Due to all of these considerations, and in particular due to the fact that EnCana, with 13.3 trillion cubic feet of proven gas reserves, dwarfing Petro-Canada's 1.8 trillion cubic feet, is ready to jump into the fray if natural gas stocks decline, I see EnCana as a strong long position. I believe the stock could move to $90 or beyond within six months.

---

At the time of publication, Vijayraghavan was long EnCana.

Vasu Vijayraghavan was an academic finance professor at the University of Paris who has now turned to a new career as a financial consultant. As an academic, she wrote on corporate governance issues, especially in the European context, and she believes in a long-run and balance sheet approach to stock picking.

Currently, Vijayraghavan is working as a consultant for lawyers, doing business valuation. She is a Level II CFA candidate and enjoys writing long/short and earnings calls pieces for TheStreet.Com.

Vijayraghavan holds a Ph.D. from the University of Michigan and a B.A. from Harvard University.