These 3 Catalysts Fueled Encana Corp's 11% Rally in September

By Markets

Image source: Copyright Encana Corporation. All rights reserved.

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What happened

Shares of Encana (NYSE: ECA) jumped 11% last month thanks to positive comments from OPEC and analysts as well as a billion-dollar equity issuance aimed at fueling growth going forward.

So what

In mid-September, Encana announced a public offering of 107 million shares, with plans to use half the proceeds to fund its 2017 capex program and the other half to bolster its balance sheet. Overall, Encana raised more than $1 billion even after pricing the shares at a slight discount to where it was trading before the announcement.

Investors who took advantage of that discount received a quick reward when OPEC said that it had agreed to cut and cap its output toward the end of the month. That agreement sent oil stocks like Encana soaring because it could stabilize the price of oil, which should enable Encana to deliver robust growth over the next five years. Driving growth is the fact that returns on premiumwells drilled in its four core areas are expected to be more than 35% at flat $50 oil and $3 gas. While those returns are not quite as good as the 60% returns that rival EOG Resources (NYSE: EOG) can earn on its premium wells at $50 oil, they could enable Encana to grow its cash flow by 300% in five years if oil averages $55 a barrel.

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Finally, Encana ended the month on a high note after analysts at Citi upgraded its stock from neutral to buy and bumped their price target up from $10 to $13. They said that the company's equity offering would likely enable itto maintain an investment-grade credit rating. Furthermore, they see the company increasing production by a 12% compound annual rate through 2021, with oil growing at a faster 20% rate, assuming $55 oil. That is a slightly higher rate than EOG Resources is forecasting, with the leading U.S. producer planning to deliver 10% annual oil production growth through 2020 at flat $50 oil and 20% annual oil output growth at $60 oil.

Now what

Investors and analysts see Encana at an inflection point. With $1 billion of additional cash from its recent equity issuance and the potential for stable-to-rising oil prices in the future thanks to OPEC, Encana is turning a corner. The company now appears poised to restart its growth engine and deliver robust production and cash flow growth over the next few years.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.