Intrinsic value of Encana - ECA

Previous Close

$11.32

  Intrinsic Value

$0.87

stock screener

  Rating & Target

str. sell

-92%

  Value-price divergence*

-66%

Previous close

$11.32

 
Intrinsic value

$0.87

 
Up/down potential

-92%

 
Rating

str. sell

 
Value-price divergence*

-66%

*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 10.9

 

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
  2,918
  4,669
  7,213
  10,787
  15,652
  22,083
  30,359
  40,750
  53,508
  68,852
  86,965
  107,991
  132,029
  159,140
  189,345
  222,636
  258,979
  298,322
  340,602
  385,749
  433,697
  484,382
  537,751
  593,765
  652,397
  713,638
  777,498
  844,002
  913,195
  985,140
  1,059,918
Variable operating expenses, $m
 
  11,183
  17,126
  25,475
  36,838
  51,858
  71,189
  95,461
  125,260
  161,099
  203,408
  252,242
  308,390
  371,713
  442,265
  520,025
  604,914
  696,810
  795,566
  901,019
  1,013,013
  1,131,401
  1,256,060
  1,386,894
  1,523,844
  1,666,890
  1,816,050
  1,971,388
  2,133,007
  2,301,054
  2,475,717
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
  4,741
  11,183
  17,126
  25,475
  36,838
  51,858
  71,189
  95,461
  125,260
  161,099
  203,408
  252,242
  308,390
  371,713
  442,265
  520,025
  604,914
  696,810
  795,566
  901,019
  1,013,013
  1,131,401
  1,256,060
  1,386,894
  1,523,844
  1,666,890
  1,816,050
  1,971,388
  2,133,007
  2,301,054
  2,475,717
Operating income, $m
  -1,823
  -6,514
  -9,913
  -14,687
  -21,185
  -29,775
  -40,830
  -54,711
  -71,752
  -92,247
  -116,443
  -144,251
  -176,360
  -212,573
  -252,920
  -297,389
  -345,935
  -398,488
  -454,964
  -515,270
  -579,316
  -647,020
  -718,308
  -793,129
  -871,448
  -953,252
  -1,038,553
  -1,127,387
  -1,219,812
  -1,315,914
  -1,415,800
EBITDA, $m
  -964
  -5,185
  -8,011
  -11,981
  -17,384
  -24,526
  -33,718
  -45,260
  -59,429
  -76,470
  -96,588
  -119,941
  -146,639
  -176,749
  -210,297
  -247,272
  -287,636
  -331,333
  -378,291
  -428,434
  -481,687
  -537,981
  -597,256
  -659,467
  -724,587
  -792,605
  -863,531
  -937,394
  -1,014,243
  -1,094,150
  -1,177,202
Interest expense (income), $m
  397
  410
  771
  1,296
  2,033
  3,037
  4,363
  6,070
  8,214
  10,845
  14,010
  17,747
  22,084
  27,042
  32,634
  38,865
  45,731
  53,228
  61,343
  70,064
  79,377
  89,267
  99,722
  110,730
  122,284
  134,378
  147,011
  160,183
  173,901
  188,173
  203,013
Earnings before tax, $m
  -1,620
  -6,924
  -10,684
  -15,984
  -23,219
  -32,812
  -45,193
  -60,781
  -79,966
  -103,093
  -130,453
  -161,997
  -198,444
  -239,615
  -285,554
  -336,254
  -391,667
  -451,716
  -516,307
  -585,334
  -658,693
  -736,287
  -818,030
  -903,859
  -993,732
  -1,087,630
  -1,185,563
  -1,287,569
  -1,393,713
  -1,504,087
  -1,618,813
Tax expense, $m
  -676
  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
  -944
  -6,924
  -10,684
  -15,984
  -23,219
  -32,812
  -45,193
  -60,781
  -79,966
  -103,093
  -130,453
  -161,997
  -198,444
  -239,615
  -285,554
  -336,254
  -391,667
  -451,716
  -516,307
  -585,334
  -658,693
  -736,287
  -818,030
  -903,859
  -993,732
  -1,087,630
  -1,185,563
  -1,287,569
  -1,393,713
  -1,504,087
  -1,618,813

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  834
  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
  14,653
  22,127
  34,186
  51,126
  74,181
  104,658
  143,881
  193,130
  253,592
  326,311
  412,157
  511,806
  625,732
  754,217
  897,370
  1,055,147
  1,227,390
  1,413,850
  1,614,227
  1,828,196
  2,055,435
  2,295,648
  2,548,584
  2,814,050
  3,091,927
  3,382,171
  3,684,823
  4,000,007
  4,327,937
  4,668,910
  5,023,307
Adjusted assets (=assets-cash), $m
  13,819
  22,127
  34,186
  51,126
  74,181
  104,658
  143,881
  193,130
  253,592
  326,311
  412,157
  511,806
  625,732
  754,217
  897,370
  1,055,147
  1,227,390
  1,413,850
  1,614,227
  1,828,196
  2,055,435
  2,295,648
  2,548,584
  2,814,050
  3,091,927
  3,382,171
  3,684,823
  4,000,007
  4,327,937
  4,668,910
  5,023,307
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
  8,998
  14,399
  22,246
  33,269
  48,271
  68,103
  93,627
  125,674
  165,018
  212,338
  268,201
  333,044
  407,179
  490,787
  583,940
  686,610
  798,692
  920,026
  1,050,416
  1,189,651
  1,337,521
  1,493,833
  1,658,425
  1,831,170
  2,011,991
  2,200,860
  2,397,802
  2,602,901
  2,816,293
  3,038,172
  3,268,786
Working capital, $m
  361
  -663
  -1,024
  -1,532
  -2,223
  -3,136
  -4,311
  -5,787
  -7,598
  -9,777
  -12,349
  -15,335
  -18,748
  -22,598
  -26,887
  -31,614
  -36,775
  -42,362
  -48,365
  -54,776
  -61,585
  -68,782
  -76,361
  -84,315
  -92,640
  -101,337
  -110,405
  -119,848
  -129,674
  -139,890
  -150,508
Total debt, $m
  5,827
  10,864
  18,256
  28,640
  42,773
  61,455
  85,499
  115,689
  152,752
  197,329
  249,952
  311,037
  380,874
  459,635
  547,388
  644,105
  749,690
  863,990
  986,821
  1,117,984
  1,257,282
  1,404,532
  1,559,582
  1,722,313
  1,892,651
  2,070,571
  2,256,096
  2,449,305
  2,650,326
  2,859,342
  3,076,587
Total liabilities, $m
  8,527
  13,564
  20,956
  31,340
  45,473
  64,155
  88,199
  118,389
  155,452
  200,029
  252,652
  313,737
  383,574
  462,335
  550,088
  646,805
  752,390
  866,690
  989,521
  1,120,684
  1,259,982
  1,407,232
  1,562,282
  1,725,013
  1,895,351
  2,073,271
  2,258,796
  2,452,005
  2,653,026
  2,862,042
  3,079,287
Total equity, $m
  6,126
  8,563
  13,230
  19,786
  28,708
  40,503
  55,682
  74,741
  98,140
  126,282
  159,505
  198,069
  242,158
  291,882
  347,282
  408,342
  475,000
  547,160
  624,706
  707,512
  795,453
  888,416
  986,302
  1,089,038
  1,196,576
  1,308,900
  1,426,026
  1,548,003
  1,674,912
  1,806,868
  1,944,020
Total liabilities and equity, $m
  14,653
  22,127
  34,186
  51,126
  74,181
  104,658
  143,881
  193,130
  253,592
  326,311
  412,157
  511,806
  625,732
  754,217
  897,370
  1,055,147
  1,227,390
  1,413,850
  1,614,227
  1,828,196
  2,055,435
  2,295,648
  2,548,584
  2,814,051
  3,091,927
  3,382,171
  3,684,822
  4,000,008
  4,327,938
  4,668,910
  5,023,307
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
  -944
  -6,924
  -10,684
  -15,984
  -23,219
  -32,812
  -45,193
  -60,781
  -79,966
  -103,093
  -130,453
  -161,997
  -198,444
  -239,615
  -285,554
  -336,254
  -391,667
  -451,716
  -516,307
  -585,334
  -658,693
  -736,287
  -818,030
  -903,859
  -993,732
  -1,087,630
  -1,185,563
  -1,287,569
  -1,393,713
  -1,504,087
  -1,618,813
Depreciation, amort., depletion, $m
  859
  1,329
  1,902
  2,706
  3,801
  5,249
  7,112
  9,451
  12,323
  15,777
  19,855
  24,310
  29,721
  35,824
  42,623
  50,117
  58,299
  67,155
  76,673
  86,836
  97,629
  109,039
  121,053
  133,662
  146,861
  160,647
  175,022
  189,993
  205,569
  221,764
  238,598
Funds from operations, $m
  412
  -5,595
  -8,783
  -13,277
  -19,418
  -27,563
  -38,081
  -51,330
  -67,643
  -87,316
  -110,599
  -137,687
  -168,723
  -203,791
  -242,931
  -286,136
  -333,368
  -384,561
  -439,634
  -498,498
  -561,064
  -627,248
  -696,977
  -770,197
  -846,871
  -926,983
  -1,010,541
  -1,097,577
  -1,188,144
  -1,282,323
  -1,380,215
Change in working capital, $m
  -213
  -249
  -361
  -508
  -691
  -913
  -1,175
  -1,476
  -1,812
  -2,179
  -2,572
  -2,986
  -3,413
  -3,850
  -4,289
  -4,727
  -5,161
  -5,587
  -6,004
  -6,411
  -6,809
  -7,197
  -7,578
  -7,954
  -8,326
  -8,696
  -9,068
  -9,444
  -9,825
  -10,216
  -10,618
Cash from operations, $m
  625
  -5,346
  -8,421
  -12,770
  -18,727
  -26,650
  -36,906
  -49,854
  -65,831
  -85,137
  -108,026
  -134,702
  -165,309
  -199,942
  -238,642
  -281,409
  -328,207
  -378,974
  -433,631
  -492,088
  -554,256
  -620,050
  -689,399
  -762,244
  -838,545
  -918,287
  -1,001,473
  -1,088,133
  -1,178,319
  -1,272,107
  -1,369,597
Maintenance CAPEX, $m
  0
  -657
  -1,051
  -1,624
  -2,428
  -3,523
  -4,971
  -6,834
  -9,173
  -12,045
  -15,499
  -19,577
  -24,310
  -29,721
  -35,824
  -42,623
  -50,117
  -58,299
  -67,155
  -76,673
  -86,836
  -97,629
  -109,039
  -121,053
  -133,662
  -146,861
  -160,647
  -175,022
  -189,993
  -205,569
  -221,764
New CAPEX, $m
  -1,132
  -5,401
  -7,847
  -11,023
  -15,002
  -19,832
  -25,523
  -32,048
  -39,344
  -47,320
  -55,862
  -64,844
  -74,134
  -83,609
  -93,153
  -102,670
  -112,082
  -121,334
  -130,390
  -139,235
  -147,870
  -156,312
  -164,591
  -172,745
  -180,821
  -188,869
  -196,943
  -205,098
  -213,392
  -221,879
  -230,615
Cash from investing activities, $m
  -29
  -6,058
  -8,898
  -12,647
  -17,430
  -23,355
  -30,494
  -38,882
  -48,517
  -59,365
  -71,361
  -84,421
  -98,444
  -113,330
  -128,977
  -145,293
  -162,199
  -179,633
  -197,545
  -215,908
  -234,706
  -253,941
  -273,630
  -293,798
  -314,483
  -335,730
  -357,590
  -380,120
  -403,385
  -427,448
  -452,379
Free cash flow, $m
  596
  -11,404
  -17,320
  -25,416
  -36,158
  -50,006
  -67,400
  -88,736
  -114,348
  -144,502
  -179,388
  -219,122
  -263,753
  -313,271
  -367,618
  -426,702
  -490,407
  -558,607
  -631,176
  -707,995
  -788,961
  -873,992
  -963,029
  -1,056,042
  -1,153,028
  -1,254,016
  -1,359,063
  -1,468,253
  -1,581,703
  -1,699,555
  -1,821,976
Issuance/(repayment) of debt, $m
  -1,116
  5,096
  7,392
  10,384
  14,133
  18,683
  24,043
  30,190
  37,063
  44,577
  52,624
  61,085
  69,837
  78,762
  87,752
  96,718
  105,585
  114,300
  122,831
  131,163
  139,298
  147,251
  155,049
  162,731
  170,338
  177,920
  185,525
  193,208
  201,021
  209,016
  217,245
Issuance/(repurchase) of shares, $m
  1,129
  10,136
  15,351
  22,539
  32,141
  44,607
  60,373
  79,841
  103,364
  131,235
  163,676
  200,561
  242,533
  289,339
  340,954
  397,314
  458,324
  523,876
  593,853
  668,140
  746,635
  829,249
  915,916
  1,006,595
  1,101,270
  1,199,954
  1,302,690
  1,409,546
  1,520,622
  1,636,044
  1,755,964
Cash from financing (excl. dividends), $m  
  13
  15,232
  22,743
  32,923
  46,274
  63,290
  84,416
  110,031
  140,427
  175,812
  216,300
  261,646
  312,370
  368,101
  428,706
  494,032
  563,909
  638,176
  716,684
  799,303
  885,933
  976,500
  1,070,965
  1,169,326
  1,271,608
  1,377,874
  1,488,215
  1,602,754
  1,721,643
  1,845,060
  1,973,209
Total cash flow (excl. dividends), $m
  614
  3,828
  5,424
  7,507
  10,116
  13,284
  17,016
  21,294
  26,079
  31,310
  36,912
  42,524
  48,616
  54,829
  61,088
  67,329
  73,502
  79,569
  85,508
  91,308
  96,971
  102,508
  107,937
  113,284
  118,580
  123,858
  129,152
  134,501
  139,940
  145,505
  151,234
Retained Cash Flow (-), $m
  41
  -10,136
  -15,351
  -22,539
  -32,141
  -44,607
  -60,373
  -79,841
  -103,364
  -131,235
  -163,676
  -200,561
  -242,533
  -289,339
  -340,954
  -397,314
  -458,324
  -523,876
  -593,853
  -668,140
  -746,635
  -829,249
  -915,916
  -1,006,595
  -1,101,270
  -1,199,954
  -1,302,690
  -1,409,546
  -1,520,622
  -1,636,044
  -1,755,964
Prev. year cash balance distribution, $m
 
  775
  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
 
  -5,533
  -9,927
  -15,033
  -22,025
  -31,323
  -43,357
  -58,546
  -77,285
  -99,925
  -126,764
  -158,038
  -193,917
  -234,510
  -279,866
  -329,984
  -384,822
  -444,307
  -508,345
  -576,832
  -649,664
  -726,741
  -807,980
  -893,311
  -982,690
  -1,076,097
  -1,173,537
  -1,275,045
  -1,380,682
  -1,490,538
  -1,604,730
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
 
  -5,142
  -8,514
  -11,809
  -15,719
  -20,137
  -24,879
  -29,693
  -34,285
  -38,346
  -41,588
  -43,772
  -44,744
  -44,446
  -42,920
  -40,303
  -36,807
  -32,693
  -28,239
  -23,715
  -19,356
  -15,347
  -11,815
  -8,826
  -6,392
  -4,484
  -3,045
  -1,998
  -1,267
  -775
  -456
Current shareholders' claim on cash, %
  100
  48.4
  24.1
  12.3
  6.4
  3.4
  1.9
  1.0
  0.6
  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 (ECA)

Valuation Ratios
P/E Ratio -11.7
Price to Sales 3.8
Price to Book 1.8
Price to Tangible Book
Price to Cash Flow 17.6
Price to Free Cash Flow -21.7
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 -8.1%
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. -59.6%
Net Profit Margin -32.4%
Net Profit Margin - 3 Yr. Avg. -35.6%
Effective Tax Rate 41.7%
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 $2918 million for the last fiscal year's total revenue generated by Encana. The default revenue input number comes from 2016 income statement of Encana. 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, 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.
    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.

Corporate tax rate of 27% is the nominal tax rate for Encana. 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 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 - $6126 million for Encana - 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 960.656 million for Encana 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 at the current share price and the inputted number of shares is $10.9 billion.

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COMPANY NEWS

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▶ Are Institutional Investors Bailing on Encana Stock?   [Oct-11-17 10:38AM  Market Realist]
▶ Analyzing the Short Interest in Encana Stock   [07:40AM  Market Realist]
▶ Where Encana Stock Could Settle This Week   [Oct-10-17 04:35PM  Market Realist]
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▶ 3 Scorching-Hot Oil Stocks -- Are They Buys?   [Oct-08-17 09:13AM  Motley Fool]
▶ Should You Buy Encana Corporation (TSX:ECA) At $14.55?   [Oct-03-17 11:16AM  Simply Wall St.]
▶ Canadas Largest Shale Play Is Gaining Momentum   [Oct-01-17 02:00PM  Oilprice.com]
▶ The Oldest Newest Natural Gas Play: Part 2   [Sep-26-17 11:32AM  GuruFocus.com]
▶ Charts Are Positive for Encana   [Sep-25-17 02:46PM  TheStreet.com]
▶ 3 Oil Stocks to Buy at the Bottom of the Cycle   [Sep-23-17 09:23AM  Motley Fool]
▶ Stocks To Watch: Encana Sees RS Rating Rise To 81   [03:00AM  Investor's Business Daily]
▶ What Marathon Oils Implied Volatility Says about Its Stock   [Sep-12-17 11:33AM  Market Realist]
▶ Pioneer Natural Resources Free Cash Flow in 2Q17   [Sep-08-17 10:37AM  Market Realist]
▶ Encana to present at Barclays CEO Energy-Power Conference   [Sep-05-17 05:00PM  GlobeNewswire]
▶ Whats the Short Interest in Encana Stock?   [Aug-18-17 10:37AM  Market Realist]
▶ Whats Encanas Implied Volatility?   [09:07AM  Market Realist]
▶ How Encanas Free Cash Flow Trended in 2Q17   [Aug-17-17 10:37AM  Market Realist]
▶ How Was Encanas 2Q17 Operational Performance?   [09:07AM  Market Realist]
▶ How Did Encanas Revenues Trend in 2Q17?   [07:37AM  Market Realist]
▶ 2Q17 Results: Encana Reported Highest Profit since 2014   [Aug-16-17 05:06PM  Market Realist]
▶ How Encana Stock Has Performed This Year   [03:25PM  Market Realist]
▶ ETFs with exposure to Encana Corp. : August 8, 2017   [Aug-08-17 04:23PM  Capital Cube]
▶ This Could Be The Biggest Winner Of The Oil Price Rebound   [Aug-01-17 07:30PM  Oilprice.com]
▶ Story Stocks from Briefing.com   [09:58AM  Briefing.com]
▶ 5 Companies To Watch As Oil Rebounds   [Jul-31-17 07:30PM  Oilprice.com]
▶ Stay Away From This Overloved Energy Stock   [Jul-28-17 01:26PM  Forbes]
▶ Encana beats Street 2Q forecasts   [Jul-21-17 07:26PM  Associated Press]
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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