Intrinsic value of Encana Corporation - ECA

Previous Close

$14.40

  Intrinsic Value

$1.16

stock screener

  Rating & Target

str. sell

-92%

  Value-price divergence*

0%

Previous close

$14.40

 
Intrinsic value

$1.16

 
Up/down potential

-92%

 
Rating

str. sell

 
Value-price divergence*

0%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ECA stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 14.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -34.01
  60.00
  54.50
  49.55
  45.10
  41.09
  37.48
  34.23
  31.31
  28.68
  26.31
  24.18
  22.26
  20.53
  18.98
  17.58
  16.32
  15.19
  14.17
  13.26
  12.43
  11.69
  11.02
  10.42
  9.87
  9.39
  8.95
  8.55
  8.20
  7.88
  7.59
Revenue, $m
  3,942
  6,307
  9,745
  14,573
  21,145
  29,832
  41,012
  55,051
  72,285
  93,013
  117,484
  145,888
  178,362
  214,986
  255,791
  300,765
  349,862
  403,011
  460,128
  521,119
  585,892
  654,364
  726,462
  802,132
  881,339
  964,072
  1,050,341
  1,140,183
  1,233,658
  1,330,851
  1,431,870
Variable operating expenses, $m
 
  15,108
  23,136
  34,414
  49,764
  70,056
  96,170
  128,960
  169,215
  217,631
  274,787
  340,757
  416,608
  502,152
  597,462
  702,509
  817,187
  941,331
  1,074,741
  1,217,200
  1,368,494
  1,528,426
  1,696,828
  1,873,574
  2,058,582
  2,251,825
  2,453,328
  2,663,175
  2,881,509
  3,108,526
  3,344,481
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  6,405
  15,108
  23,136
  34,414
  49,764
  70,056
  96,170
  128,960
  169,215
  217,631
  274,787
  340,757
  416,608
  502,152
  597,462
  702,509
  817,187
  941,331
  1,074,741
  1,217,200
  1,368,494
  1,528,426
  1,696,828
  1,873,574
  2,058,582
  2,251,825
  2,453,328
  2,663,175
  2,881,509
  3,108,526
  3,344,481
Operating income, $m
  -2,463
  -8,800
  -13,392
  -19,841
  -28,620
  -40,224
  -55,158
  -73,909
  -96,930
  -124,618
  -157,303
  -194,869
  -238,246
  -287,166
  -341,671
  -401,745
  -467,325
  -538,320
  -614,613
  -696,081
  -782,602
  -874,062
  -970,367
  -1,071,442
  -1,177,243
  -1,287,753
  -1,402,987
  -1,522,992
  -1,647,851
  -1,777,675
  -1,912,611
EBITDA, $m
  -1,302
  -7,005
  -10,823
  -16,185
  -23,484
  -33,133
  -45,550
  -61,141
  -80,282
  -103,304
  -130,481
  -162,028
  -198,095
  -238,771
  -284,090
  -334,040
  -388,568
  -447,598
  -511,034
  -578,772
  -650,712
  -726,759
  -806,833
  -890,875
  -978,845
  -1,070,731
  -1,166,545
  -1,266,326
  -1,370,143
  -1,478,088
  -1,590,284
Interest expense (income), $m
  536
  553
  1,042
  1,751
  2,747
  4,103
  5,895
  8,201
  11,096
  14,651
  18,927
  23,974
  29,833
  36,532
  44,086
  52,503
  61,780
  71,907
  82,870
  94,652
  107,232
  120,593
  134,717
  149,588
  165,197
  181,535
  198,600
  216,395
  234,927
  254,208
  274,256
Earnings before tax, $m
  -2,189
  -9,354
  -14,434
  -21,592
  -31,367
  -44,326
  -61,052
  -82,110
  -108,026
  -139,269
  -176,230
  -218,843
  -268,079
  -323,698
  -385,757
  -454,248
  -529,105
  -610,227
  -697,483
  -790,733
  -889,834
  -994,655
  -1,105,083
  -1,221,031
  -1,342,440
  -1,469,288
  -1,601,587
  -1,739,388
  -1,882,778
  -2,031,883
  -2,186,867
Tax expense, $m
  -914
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  -1,275
  -9,354
  -14,434
  -21,592
  -31,367
  -44,326
  -61,052
  -82,110
  -108,026
  -139,269
  -176,230
  -218,843
  -268,079
  -323,698
  -385,757
  -454,248
  -529,105
  -610,227
  -697,483
  -790,733
  -889,834
  -994,655
  -1,105,083
  -1,221,031
  -1,342,440
  -1,469,288
  -1,601,587
  -1,739,388
  -1,882,778
  -2,031,883
  -2,186,867

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  1,127
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  19,797
  29,892
  46,183
  69,067
  100,212
  141,385
  194,372
  260,904
  342,584
  440,822
  556,794
  691,412
  845,317
  1,018,891
  1,212,279
  1,425,425
  1,658,112
  1,910,006
  2,180,700
  2,469,757
  2,776,740
  3,101,249
  3,442,946
  3,801,572
  4,176,963
  4,569,060
  4,977,920
  5,403,711
  5,846,720
  6,307,349
  6,786,113
Adjusted assets (=assets-cash), $m
  18,670
  29,892
  46,183
  69,067
  100,212
  141,385
  194,372
  260,904
  342,584
  440,822
  556,794
  691,412
  845,317
  1,018,891
  1,212,279
  1,425,425
  1,658,112
  1,910,006
  2,180,700
  2,469,757
  2,776,740
  3,101,249
  3,442,946
  3,801,572
  4,176,963
  4,569,060
  4,977,920
  5,403,711
  5,846,720
  6,307,349
  6,786,113
Revenue / Adjusted assets
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
  0.211
Average production assets, $m
  12,157
  19,451
  30,052
  44,943
  65,211
  92,003
  126,483
  169,777
  222,927
  286,853
  362,319
  449,918
  550,068
  663,017
  788,859
  927,558
  1,078,973
  1,242,887
  1,419,034
  1,607,130
  1,806,891
  2,018,057
  2,240,408
  2,473,774
  2,718,050
  2,973,197
  3,239,252
  3,516,325
  3,804,601
  4,104,343
  4,415,886
Working capital, $m
  488
  -896
  -1,384
  -2,069
  -3,003
  -4,236
  -5,824
  -7,817
  -10,264
  -13,208
  -16,683
  -20,716
  -25,327
  -30,528
  -36,322
  -42,709
  -49,680
  -57,228
  -65,338
  -73,999
  -83,197
  -92,920
  -103,158
  -113,903
  -125,150
  -136,898
  -149,148
  -161,906
  -175,179
  -188,981
  -203,326
Total debt, $m
  7,873
  14,677
  24,663
  38,691
  57,783
  83,022
  115,503
  156,287
  206,357
  266,577
  337,668
  420,188
  514,532
  620,933
  739,480
  870,139
  1,012,776
  1,167,187
  1,333,122
  1,510,314
  1,698,494
  1,897,419
  2,106,879
  2,326,717
  2,556,831
  2,797,187
  3,047,818
  3,308,828
  3,580,392
  3,862,758
  4,156,240
Total liabilities, $m
  11,521
  18,324
  28,310
  42,338
  61,430
  86,669
  119,150
  159,934
  210,004
  270,224
  341,315
  423,835
  518,179
  624,580
  743,127
  873,786
  1,016,423
  1,170,834
  1,336,769
  1,513,961
  1,702,141
  1,901,066
  2,110,526
  2,330,364
  2,560,478
  2,800,834
  3,051,465
  3,312,475
  3,584,039
  3,866,405
  4,159,887
Total equity, $m
  8,277
  11,568
  17,873
  26,729
  38,782
  54,716
  75,222
  100,970
  132,580
  170,598
  215,479
  267,576
  327,138
  394,311
  469,152
  551,640
  641,689
  739,172
  843,931
  955,796
  1,074,598
  1,200,183
  1,332,420
  1,471,208
  1,616,484
  1,768,226
  1,926,455
  2,091,236
  2,262,681
  2,440,944
  2,626,226
Total liabilities and equity, $m
  19,798
  29,892
  46,183
  69,067
  100,212
  141,385
  194,372
  260,904
  342,584
  440,822
  556,794
  691,411
  845,317
  1,018,891
  1,212,279
  1,425,426
  1,658,112
  1,910,006
  2,180,700
  2,469,757
  2,776,739
  3,101,249
  3,442,946
  3,801,572
  4,176,962
  4,569,060
  4,977,920
  5,403,711
  5,846,720
  6,307,349
  6,786,113
Debt-to-equity ratio
  0.951
  1.270
  1.380
  1.450
  1.490
  1.520
  1.540
  1.550
  1.560
  1.560
  1.570
  1.570
  1.570
  1.570
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
  1.580
Adjusted equity ratio
  0.383
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387
  0.387

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -1,275
  -9,354
  -14,434
  -21,592
  -31,367
  -44,326
  -61,052
  -82,110
  -108,026
  -139,269
  -176,230
  -218,843
  -268,079
  -323,698
  -385,757
  -454,248
  -529,105
  -610,227
  -697,483
  -790,733
  -889,834
  -994,655
  -1,105,083
  -1,221,031
  -1,342,440
  -1,469,288
  -1,601,587
  -1,739,388
  -1,882,778
  -2,031,883
  -2,186,867
Depreciation, amort., depletion, $m
  1,161
  1,795
  2,569
  3,656
  5,135
  7,091
  9,608
  12,768
  16,648
  21,314
  26,822
  32,841
  40,151
  48,395
  57,581
  67,705
  78,757
  90,722
  103,579
  117,309
  131,890
  147,303
  163,533
  180,567
  198,398
  217,022
  236,442
  256,666
  277,708
  299,587
  322,327
Funds from operations, $m
  556
  -7,558
  -11,865
  -17,936
  -26,231
  -37,235
  -51,444
  -69,342
  -91,379
  -117,955
  -149,408
  -186,002
  -227,928
  -275,303
  -328,176
  -386,543
  -450,348
  -519,505
  -593,904
  -673,424
  -757,944
  -847,352
  -941,550
  -1,040,463
  -1,144,042
  -1,252,266
  -1,365,145
  -1,482,721
  -1,605,070
  -1,732,296
  -1,864,539
Change in working capital, $m
  -288
  -336
  -488
  -686
  -933
  -1,234
  -1,588
  -1,993
  -2,447
  -2,943
  -3,475
  -4,033
  -4,611
  -5,201
  -5,794
  -6,386
  -6,972
  -7,547
  -8,111
  -8,661
  -9,198
  -9,723
  -10,238
  -10,745
  -11,247
  -11,748
  -12,250
  -12,758
  -13,273
  -13,801
  -14,345
Cash from operations, $m
  844
  -7,222
  -11,377
  -17,251
  -25,298
  -36,002
  -49,857
  -67,349
  -88,931
  -115,012
  -145,933
  -181,969
  -223,317
  -270,102
  -322,382
  -380,156
  -443,376
  -511,958
  -585,793
  -664,763
  -748,746
  -837,629
  -931,312
  -1,029,718
  -1,132,795
  -1,240,518
  -1,352,895
  -1,469,964
  -1,591,796
  -1,718,495
  -1,850,195
Maintenance CAPEX, $m
  0
  -887
  -1,420
  -2,194
  -3,281
  -4,760
  -6,716
  -9,232
  -12,392
  -16,272
  -20,938
  -26,447
  -32,841
  -40,151
  -48,395
  -57,581
  -67,705
  -78,757
  -90,722
  -103,579
  -117,309
  -131,890
  -147,303
  -163,533
  -180,567
  -198,398
  -217,022
  -236,442
  -256,666
  -277,708
  -299,587
New CAPEX, $m
  -1,529
  -7,294
  -10,601
  -14,891
  -20,267
  -26,792
  -34,480
  -43,294
  -53,151
  -63,926
  -75,466
  -87,599
  -100,150
  -112,949
  -125,842
  -138,699
  -151,415
  -163,913
  -176,147
  -188,096
  -199,761
  -211,166
  -222,350
  -233,366
  -244,276
  -255,148
  -266,055
  -277,073
  -288,277
  -299,742
  -311,543
Cash from investing activities, $m
  -39
  -8,181
  -12,021
  -17,085
  -23,548
  -31,552
  -41,196
  -52,526
  -65,543
  -80,198
  -96,404
  -114,046
  -132,991
  -153,100
  -174,237
  -196,280
  -219,120
  -242,670
  -266,869
  -291,675
  -317,070
  -343,056
  -369,653
  -396,899
  -424,843
  -453,546
  -483,077
  -513,515
  -544,943
  -577,450
  -611,130
Free cash flow, $m
  805
  -15,404
  -23,397
  -34,335
  -48,846
  -67,554
  -91,052
  -119,875
  -154,475
  -195,210
  -242,337
  -296,015
  -356,308
  -423,202
  -496,620
  -576,437
  -662,496
  -754,628
  -852,663
  -956,438
  -1,065,816
  -1,180,685
  -1,300,966
  -1,426,618
  -1,557,638
  -1,694,063
  -1,835,971
  -1,983,478
  -2,136,739
  -2,295,945
  -2,461,325
Issuance/(repayment) of debt, $m
  -1,508
  6,884
  9,986
  14,028
  19,092
  25,239
  32,481
  40,784
  50,070
  60,220
  71,091
  82,521
  94,344
  106,401
  118,547
  130,658
  142,637
  154,411
  165,936
  177,192
  188,181
  198,924
  209,460
  219,837
  230,114
  240,356
  250,631
  261,010
  271,564
  282,365
  293,482
Issuance/(repurchase) of shares, $m
  1,525
  13,692
  20,739
  30,448
  43,420
  60,260
  81,558
  107,858
  139,636
  177,287
  221,111
  270,940
  327,641
  390,871
  460,599
  536,735
  619,155
  707,710
  802,242
  902,597
  1,008,636
  1,120,240
  1,237,320
  1,359,819
  1,487,716
  1,621,030
  1,759,816
  1,904,169
  2,054,222
  2,210,147
  2,372,149
Cash from financing (excl. dividends), $m  
  18
  20,576
  30,725
  44,476
  62,512
  85,499
  114,039
  148,642
  189,706
  237,507
  292,202
  353,461
  421,985
  497,272
  579,146
  667,393
  761,792
  862,121
  968,178
  1,079,789
  1,196,817
  1,319,164
  1,446,780
  1,579,656
  1,717,830
  1,861,386
  2,010,447
  2,165,179
  2,325,786
  2,492,512
  2,665,631
Total cash flow (excl. dividends), $m
  830
  5,171
  7,328
  10,141
  13,666
  17,945
  22,987
  28,767
  35,231
  42,297
  49,865
  57,446
  65,677
  74,070
  82,526
  90,957
  99,296
  107,492
  115,515
  123,351
  131,001
  138,480
  145,814
  153,038
  160,193
  167,322
  174,475
  181,700
  189,048
  196,567
  204,306
Retained Cash Flow (-), $m
  55
  -13,692
  -20,739
  -30,448
  -43,420
  -60,260
  -81,558
  -107,858
  -139,636
  -177,287
  -221,111
  -270,940
  -327,641
  -390,871
  -460,599
  -536,735
  -619,155
  -707,710
  -802,242
  -902,597
  -1,008,636
  -1,120,240
  -1,237,320
  -1,359,819
  -1,487,716
  -1,621,030
  -1,759,816
  -1,904,169
  -2,054,222
  -2,210,147
  -2,372,149
Prev. year cash balance distribution, $m
 
  1,047
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -7,473
  -13,411
  -20,308
  -29,754
  -42,315
  -58,571
  -79,091
  -104,405
  -134,990
  -171,247
  -213,494
  -261,964
  -316,801
  -378,073
  -445,778
  -519,859
  -600,218
  -686,727
  -779,247
  -877,636
  -981,760
  -1,091,506
  -1,206,780
  -1,327,524
  -1,453,707
  -1,585,340
  -1,722,468
  -1,865,174
  -2,013,580
  -2,167,843
Discount rate, %
 
  7.60
  7.98
  8.38
  8.80
  9.24
  9.70
  10.18
  10.69
  11.23
  11.79
  12.38
  13.00
  13.65
  14.33
  15.05
  15.80
  16.59
  17.42
  18.29
  19.20
  20.17
  21.17
  22.23
  23.34
  24.51
  25.74
  27.02
  28.37
  29.79
  31.28
PV of cash for distribution, $m
 
  -6,946
  -11,502
  -15,952
  -21,235
  -27,204
  -33,609
  -40,112
  -46,316
  -51,802
  -56,181
  -59,132
  -60,446
  -60,042
  -57,981
  -54,446
  -49,723
  -44,165
  -38,148
  -32,036
  -26,148
  -20,733
  -15,961
  -11,923
  -8,635
  -6,058
  -4,113
  -2,700
  -1,711
  -1,046
  -616
Current shareholders' claim on cash, %
  100
  47.2
  22.9
  11.4
  5.8
  3.0
  1.6
  0.9
  0.5
  0.3
  0.2
  0.1
  0.1
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0

Encana Corporation is an energy producer that is focused on developing its multi-basin portfolio of natural gas, oil and natural gas liquids (NGLs) producing plays. The Company's operations also include the marketing of natural gas, oil and NGLs. All of its reserves and production are located in North America. It operates through three segments: Canadian Operations, USA Operations and Market optimization. Its Canadian Operations segment includes the exploration for, development of, and production of natural gas oil and NGLs and other related activities within Canada. Its Canadian operations include Montney in northeast British Columbia and northwest Alberta and Duvernay in west central Alberta. The USA Operations include the exploration for, development of, and production of natural gas, oil and NGLs, and other related activities within the United States. The Market Optimization activities are primarily responsible for the sale of the Company's production to third party customers.

FINANCIAL RATIOS  of  Encana Corporation (ECA)

Valuation Ratios
P/E Ratio -11
Price to Sales 3.6
Price to Book 1.7
Price to Tangible Book
Price to Cash Flow 16.6
Price to Free Cash Flow -20.5
Growth Rates
Sales Growth Rate -34%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -49.3%
Cap. Spend. - 3 Yr. Gr. Rate -16%
Financial Strength
Quick Ratio 14
Current Ratio 0
LT Debt to Equity 94.2%
Total Debt to Equity 95.1%
Interest Coverage -3
Management Effectiveness
Return On Assets -4.7%
Ret/ On Assets - 3 Yr. Avg. -3.4%
Return On Total Capital -8%
Ret/ On T. Cap. - 3 Yr. Avg. -7.1%
Return On Equity -15.4%
Return On Equity - 3 Yr. Avg. -11.6%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 56%
Gross Margin - 3 Yr. Avg. 67.8%
EBITDA Margin -12.5%
EBITDA Margin - 3 Yr. Avg. -19.6%
Operating Margin -62.5%
Oper. Margin - 3 Yr. Avg. -59.1%
Pre-Tax Margin -55.5%
Pre-Tax Margin - 3 Yr. Avg. -59.7%
Net Profit Margin -32.3%
Net Profit Margin - 3 Yr. Avg. -35.6%
Effective Tax Rate 41.8%
Eff/ Tax Rate - 3 Yr. Avg. 34.4%
Payout Ratio -5.4%

ECA stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ECA stock intrinsic value calculation we used $3942 million for the last fiscal year's total revenue generated by Encana Corporation. The default revenue input number comes from 2016 income statement of Encana Corporation. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ECA stock valuation model: a) initial revenue growth rate of 60% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 7.6%, whose default value for ECA is calculated based on our internal credit rating of Encana Corporation, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Encana Corporation.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ECA stock the variable cost ratio is equal to 243.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for ECA stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 7.1% for Encana Corporation.

Corporate tax rate of 27% is the nominal tax rate for Encana Corporation. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ECA stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ECA are equal to 308.4%.

Life of production assets of 13.7 years is the average useful life of capital assets used in Encana Corporation operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ECA is equal to -14.2%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $8277 million for Encana Corporation - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 972.902 million for Encana Corporation is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Encana Corporation at the current share price and the inputted number of shares is $14.0 billion.

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Financial statements of ECA
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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