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O Canada, O EnCana (duh!)

by: Jake Berzon May 17, 2008 | about stocks: COP / ECA    

Jake Berzon

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EnCana (ECA) is basically a Canadian natural gas producer with large holdings of oil sands in Alberta, Canada. They also have a large US operation and an integrated oil business with Conoco Phillips (COP).

On Sunday, May 11, 2008, ECA announced their plans to split the company into two parts - a pure-play natural gas company and a separate oil company. Wall Street went ecstatic over the announcement and the stock immediately ascended to a new 52-week high on Monday. Anybody who is a somebody in the world of money wrote an article on EnCana, and the buzz, well, it buzzed! With their 20/20 hindsight vision, several analysts responded by raising their ratings and price targets. And Friday, the stock made a new 52-week high.

There is no question that EnCana is one great company (and soon to be two). The only trouble is that after the recent run-up in share price, it is now a company that is at least fairly valued, trading at a trailing 12-month PE of 20, above its historic 5-year average of 13 and at a premium to the industry average of 17.

And that's not to mention that EnCana's Q1 quarterly results were rather miserable. Expectations run high that this quarter earnings will recover, yet they are still expected to fall short of the year ago quarter. All in all, I see the latest run-up in price as a great opportunity to jump ship. I sold today, exactly two years after purchase, at $94.05 /share for a gain of 98.8% accounting for dividends, but ignoring taxes and commissions.

And the best thing of all, is that I don't anticipate having to pay any taxes on this transaction - in 2006 US Congress in their infinite wisdom reduced long term capital gains taxes for years 2008 - 2010 for poor folks in my income tax bracket to 0% - nice!

Disclosure: No position EPA, COP

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This article has 4 comments:

  •  
    May 18 09:47 AM
    Q1 was not miserable. There was mark to market "losses" on hedges. Better check with your accountant on tax rate. Your income has to be real low including capital gain.
    Reply
  •  
    May 19 01:52 AM
    Frighteningly superficial analysis. Based on a P/E that includes a huge one-time accounting writedown on hedging. Good to have stock released into the market from weak hands.
    Reply
  •  
    May 19 09:07 PM
    Maybe the author was joking about the taxes? You would have to make less than 33,000 I think in 08 to pay no long term cap gains. I don't know if I could be enduced to take a stock buy or sell from someone who doesn't make any money at it.

    I agree with sliman. Q1 wasn't miserable. I don't know what "rather miserable" means. Maybe the author was referring to another stock? If you think its a great company then why sell? We all learned in Beginning Investors you shouldn't sell just because something has run up a lot. What goes up doesn't always come down. Sometimes it keeps going up.
    Reply
  •  
    May 20 03:29 AM
    One other thing that you better learn quickly is not to get too greedy and lock in your gains once the risk outweighs the potential reward.

    I realize that the "miserable" Q1 performance is expected to be short term. Whatever the excuse, whether paper loss or operational, the company still didn't post the numbers as expected. There is a large downside risk, if they miss again for whatever reason. And as gas and oil prices continue to skyrocket, consumers in North America are cutting back. I am convinced that EnCana businesses will not be able to grow as fast as expected.

    Thus, this was the right time for me to lock in the gains.

    Regarding taxes, the break is for incomes under $65,100, for joint filers. Because of our particular situation, I anticipate that almost all of our income this year will come from capital gains and my intention is to take gains only up to this limit.

    Hope this clarifies things.

    P.S. I enjoy writing about my personal stock selections. My goal is to produce readable and interesting pieces. However, I do not do complete brain dumps or full stock analysis and have no interest in inducing anyone to buy or sell stocks.
    Reply
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