Morgan Stanley Says Encana Is 'Pulling The Trigger,' Upgrades To Overweight

In a report published Tuesday, Morgan Stanley analyst Benny Wong upgraded shares of Encana Corporation (USA) (NYSE: ECA) to Overweight from Equal-weight with a price target raised to $18 from a previous $15 based on an improving asset base.

According to Wong, Encana's asset base continues to improve as it becomes increasingly liquids weighted – rising from 10 percent in 2013 to an estimated 40 percent in 2016. A greater focus on liquids brings improving productivity for the company while decreasing costs. In fact, Encana has the highest liquids growth among its U.S. peers with a 37 percent compounded annual growth rate through 2018.

"We see liquids growth start to outperform peers in the next 12 months with the potential of further non-core divestitures to deleverage," Wong wrote. "Both are key to the re-rating potential of Encana into a liquids weighted E&P."

Wong noted that the company's balance sheet is expected to improve from 3.4x 2015 net-debt-to-trail cash flow (versus 2.4x U.S. peers) to 2.6x (versus 2.8x peers) in 2016. The analyst also added that Encana's sale of non-core asset including the DJ Basin and San Juan ($1.4 billion to $1.6 billion) and Haynesville ($1 billion) could improve its net debt-to-trailing cash flow to approximately 2.0x.

Bottom line, Encana is an "improving story" that investors will ultimately recognize with a re-rating to a higher valuation and narrow the valuation gap with its U.S. peers over time. Moreover, the analyst's price target implies a total return of around 35 percent, the greatest in his Canadian Energy coverage.