Thursday, June 21, 2012

Lets look at EnCana (ECA) today. It trades on the TSX and on the big board the NYSE. For discussion and to determine the entry and exit points. Using P/E and CF/S
By using the historical P/E ratio and CF/S ratio one can determine what the entry and exit positions should be and I’ll look at the dividend ratio (D/S) for this company.
ECA has been a publicly traded company for more 10 years and ECA is a unconventional gas company.
 So here we go: for the past 3 years (excluding 2011) ECA has had an average P/E trading range of 12.4 (high) and 8.43 (low). Over a longer term ECA had an average P/E ratio of 18.7(high) and 7.6(low) over the past 10 years (excluding 2011). ECA has also had some wild swings in the past, for example P/E values in 2011 ECA had a very high P/E ratio of 201.5 and a low P/E ratio 2.3 in 2008. With a current P\E of 255.3 it looks like ECA is way ahead of its self based on the ranges.
 ECA has over time had an average annual Earnings growth of 15% over the past 10 years with some bumps along the way. The Earnings growth for ECA over the past 3 years paint a very different picture as the Earning growth has fallen into the negative.
For the purposes of this analysis I am using the average of a 0% increase for 2012 to determine what ECA should be valued at.
Knowing or at least estimating future earnings you can estimate the share price. In this case ECA should earn about $1.94 in 2012 and using the average P/E the estimated trading range should be $24.06 (high) and $16.36 (low).

ECA is a dividend payer which it started paying in 2002. Over that time ECA had increase its dividend up to a very nice level and in 2010 ECA began to chop at its dividend. Lets hope that ECA doesn’t continue slashing its dividend in the coming quarters. I am projecting that ECA’s dividend will remain at .80 per share which is paid quarterly.
ECA’s dividend yield for the past 3 year average Yield ranged of 2.87 (high) to 4.39 (low). Currently ECA is paying a 3.95% based on its current price $20.49.
Looking at the math for the dividends and working it backwards the dividend would support a share price of $27.86 (high) and 18.24 (low). I don’t believe ECA’s price will fall to the yield range of 7.56% like in 2008. If that were to occur I would suspect that ECA would cut its dividend again.

Looking at the price per cash flow ratio (P/CF). ECA has increased its average CF/S by 8.32% over the past 10 years. ECA’s 10 year P/CF ratio is 18.7 (high) and 7.6(low). To me this longer term average is much to rich as I prefer the 3 year average with 12.4 (high) and 8.43(low) which I’ll use to determine the estimated price.

This gives ECA a share price based on a cash flow of $31.85 (high) and $20.47 (low). With todays price of $20.49 it appears to be at the lower end of value based on this price. CF/S for 2012 is estimated to be $5.16 per share which is an increase of 5% over 2011. The first quarter report states that ECA has had a 6% increase Cash flow in Q1.

To sum it up: current price $20.49
P/E bottom of the price range $16.36
D/S near the bottom end of range $18.24.
CF/S is at its lowest estimated price range $20.47

With ECA it’s a matter of trying to predict the future price of its finished product, in this case Natural Gas. With Natural Gas off last years ultra low price it maybe a time to look at ECA as a longer term investment.
ECA options trades on the www.x-m.ca and on the www.CBOE.com.

As I am looking to get a position in ECA I’ll write Put at my estimated price. In this case I’m looking between $16 and $20. (Closer to $16 ) Looking at both exchanges you could trade at either and be happy with the exchanges. In this case I’ll favour the Montreal exchange over the CBOE. So I’ll write 10 Puts for the October expiry with a strike price of $17, collecting the premium of $.65 per share or $650.00 before commission. That works out to be 3.8% for this 4 month trade, 11.4% annual.

Looking on the Call side, if you purchased here at $20.49 and sold the Covered Call at 21 for the current month of July for the premium of $.65, that would yield you a nice return for the 4 weeks as the worse case would be a 3.1% from the premium. The best case would be that it gets called away at $21 dollars and earning you a 5.6% gross return(before commission) over the next 4 weeks.

Or if your fairly sure that ECA is under priced at this price level, you could pick it up here and sell further out. Having a look at the October 23 Calls, having a premium of .85 cents. Your worst case would be collecting the .85 cent premium and at least one Dividend of .20 cents, gives a return of 5.12%. With the best case being that it gets called away at $23 dollars making your gross (assuming only one dividend collected) being $3.56 per share or 17.37%. Not bad for a 4 month holding period !