ENCANA: THE SLEEPING GIANT

Encana is one of the strongest plays in the natural gas space. This is definitely one industry that seems to be having a perpetual 'bear raid'. But do you believe that natural gas prices will recover from their all time multi-year lows? If you factor in increasing demand from an economic recovery and the increased use of natural gas as an alternative fuel source, due to cheaper costs, I think the answer is yes.

When prices do recover Encana is in the perfect position to take advantage. Encana is involved mainly in 'unconventional' plays. These 'unconvential' plays are potentially massive fields that are hard to tap unless you have plenty of cash; something Encana has a lot of.  This also gives Encana some of the best margins in the industry. In a competitive market, with low prices and huge supplies you want to have your money with the cheapest producer with the best balance sheet: Encana definitely fits the bill in both those areas.

As always I like to go through some great fundamental points on why to own the company before we look at some technical hints to find the best entry point.


FUNDAMENTALS:

STOCK BUY-BACK PROGRAM


Encana announced a buy-back program for 5% of the outstanding shares. That is a billion dollar buy-back program that would result in the cancellation of up to 37 million shares. I appreciate the foresight here as Encana has some of the best and cost effective properties so what better place to investment free cash flow than Encana itself.


FINANCIALS



For fiscal 2009 Encana boasted a 2 billion dollar free cash flow. This is while natural gas prices were at all time lows. However, it is fair to note that they had an excellent hedging program to sell natural gas prices at a much higher price. One could expect their revenue and earnings to take a hit in the short if the natural gas prices stay depressed, however, the market has already more than priced this in. It has a strong balance sheet and the best margins in the industry, meaning there is no better way of playing this sector. They boast a Price/cash flow ratio for the trailing twelve months of 3.8 when the industry average is 10.3.




TECHNICALS

Although the movement of this stock over the last little while has been boring I think we have a solid consolidation pattern making for quite a juicy entry. Of course I would like to see Encana break through resistance at $ 29 US before declaring a clear break to the top

Great Swing Trade

How to Play:
Aggressive: Buy Stock and write $22 Call or if you are feeling more aggressive write $23 call
Conservative: Write 21 Put or if you feeling more conservative write $20 put.

Finding it hard to find value in this very hot market ? Well look at this excellent swing trade coming on the horizon .Lets consider Chesapeake Energy. Chesapeake energy is the second biggest natural gas producer in North America.

Fundamentally Chesapeake is very cheap at these level
- Trading at a discount to book value: The book show net tangible assets of $14.8 Billion while the market capitalization presently sits at 13.8 billion. While this is not a massive discount one could expect the margin of safety to get a lot better as the company becomes more profitable.
- Forward P/E of 8- Based on analyst estimates of future earnings
-Wonderful play on the recovery of natural gas prices: Natural gas prices are very depressed in the short term. With the upcoming winter months this stock would be a very safe way of playing the recovery on natural gas
- Hedging: the company has used very effective hedging strategies in the past. In 2009 for example its hedging gains were $2.3 Billion. Moreover, CHK has shorted some 70000 or so natural gas futures call contracts with an $8 strike price with expiration dates ranging from 2010-2013.

TECHNICAL INSIGHT

* We see CHK following the positive trend line established from below.
* A breakup passed the dowward wedge pattern is a very bullish signal indicating that CHK is ready to break to the upside.
* On the MACD we see a nice "cup" formation with the 12 day moving average looking to break passed the 26 day moving average.
*RSI is still in oversold territory
* CHK had a strong day on Friday closing passed its 50 day moving average ($21.63) to close at $21.68. A breakup on Monday passed these levels could see CHK not encountering resistance till $22.50.

OPTIONS INSIGHT:
Will be posted shortly

BETTING ON AN ECONOMIC RECOVERY?? CONSIDER DRYSHIPS

Type of Play: Speculative: Turnaround Play

Dry Ships (NASDAQ: DRYS) has lost almost 97% of its value since the beginning of the economic crisis of 2008. Can the smart contrarian find an end to the plunder in this stock and the shipping sector as a whole? Everybody loves a good turnaround play. There is nothing more pleasurable than seeing a company through its obstacles and getting rewarded very handsomely for it.

The company engages in the ownership and operation of drybulk carriers and drilling rigs that operate worldwide. Investors have been fleeing Dryships due to its heavy debt load, a slowdown in offshore drilling due to the spill in the gulf and a reduction in shipping prices due to an oversupply of ships.

We think that assuming an economic recovery and increasing demand from emerging markets we can make a strong bullish case for the shipping industry. This article will go through a fundamental analysis of the company as well as a technical analysis right below to ensure we can find the right time to get in.

Let us go through our top 2 Fundamental reasons for pursuing DryShips:

1. Improvement in the Industry 

The Baltic Dry Index¹ which tracks worldwide international shipping prices of various dry bulk cargoes is at a historically low level.  The reason behind this trend was due to the shipping industries lack of foresight: adding to their fleet at the height of the economic boom. So the result is that the shippers have drastically reduced their prices to ensure there very pricey ships don’t stay idle. There will definitely be a reversal in this trend once more volume comes on line.

In fact if we compare the Baltic dry Index to major commodities we see that shipping prices are lagging overall commodity prices Please see the diagram below

In this Diagram: Baltic Dry Index vs Copper

As can be seen from the graphs above the Baltic dry Index is lagging major commodity prices and we should see a convergence in the prices.

We definitely see resurgence in global demand. The latest china PMI is a definite indication of that with the number been at its highest level in four months.

1. Improvement in Company Fundamentals.

The company prospects are certainly turning; Dryships was recently awarded a $135 million contract to explore the West African Coastline for a year. Moreover analysts have a $7-$8 price target which could definitely be raised if they are awarded more contracts. Doing a more thorough analysis of its financials I discovered a few more things;

-          Sales Growth is up 6.2% last quarter.

-          Net Income is up 33% since last quarter and entering the busiest quarter of the year for the shipping industry we expect this number to be better this quarter.

-          Cash flow per share is $0.66 on December 2009 up from $-2.65 per share on December 2008. It is clear that increased profitability is helping the company increase its liquidity.

The elephant in the room is definitely Dryships debt. Dryships debt load, around billion, is staying relatively stable in light of increased sales. It should be able to ease this debt load with its increased profitability and liquidity




TECHNICAL INSIGHT

Commentary will be posted very shortly

OPTIONS INSIGHT
Will be posted very shortly