Encana CEO Randy Eresman
Encana Corp.'s growth plans have been frustrated by slumping natural gas prices, and that should have investors in the bond market avoiding the producer's bonds at current prices.
That's the conclusion of analyst Philip Adams at corporate debt specialists Gimme Credit, who cut his recommendation on Encana ECA-T bonds to "underperform." His concern is that Encana's stunted growth will leave shareholders hungry for returns, which will incent management to do things like share buybacks and moves to lever up the balance sheet.
The problem is weak gas prices have caused Encana to put off the ambitious growth projects that were supposed to feed the company's fast expansion. At the same time, Encana is running into higher prices for services in hot gas plays where drilling is busy despite the weak prices. (Since many producers have a view that prices aren't going to get better for a while, many are trying to offset that with faster drilling and added production.) Encana is being disciplined and slowing drilling, "but it interferes with ECA's growth story, perhaps making ECA shareholders a bit antsy for more cash," Mr. Adams said.
"We believe Encana management will be reasonably good stewards of the balance sheet. But a declining hedge position in the context of a continuing weak outlook for natural gas prices, a growth imperative that may temper the curtailment of capital investment, leverage targets that are higher than current levels, and potential pressure for share buybacks, suggest that ECA's bond spreads are tighter than they should be for awhile," he said.