Does Encana (ECA) have blockbuster growth potential? Everyone knows that North American natural gas prices are scrapping along at multi-decade lows, while world natural gas prices are many multiples higher. Will North American natural gas export terminals slated for opening in 2015 cause North American natural gas prices to spike to world price levels and result in ECA reaping windfall profits?
Why is Encana interesting?
Encana’s Land Holdings Are a Hidden Asset
Encana owns more than 3 million hectares of land and subsurface rights on that land. This land was originally granted to the Canadian Pacific Railway in the late 1800s and Encana doesn’t have to pay royalties on this land.
Encana’s massive land holdings are an immense potentially undervalued asset that no other producer can replicate. Encana essentially acquired the land more than a hundred years ago and at prices that are many multiples lower than today’s prices and land holdings of this size are simply no longer available today.
But what makes their land even more valuable is that they don’t have to pay royalties to the Crown on this land since it was granted so long ago. So they have a cost advantage that other producers who have to pay royalties simply cannot match.
This hidden asset gives Encana a lower cost structure and also allows it to make highly accretive joint venture exploration deals with firms like Kogas and Crescent Point Energy. Essentially they can offload a portion of the exploration risk in these joint ventures and still reap the rewards through royalties, because of their unique asset.