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Financial Analysis Project Eca & Cnq

6925 words - 28 pages

1.0 Executive SummaryThis report presents a financial evaluation of two Canadian oil and gas companies, Encana Corporation (ECA) and Canadian Natural Resources Limited (CNQ). These two Canadian owned companies are amongst the most dynamic and rapidly growing companies in this industry.Although the conventional oil production is expected to decline by about 46% between 2003 and 2015; natural gas production is expected to decline by about 2.5% over the next decade, these two companies are expected to continue growing due to their aggressive strategy to purchase other companies, diversify internationally, and invest in oilsands projects for future oil production.The assessment of two companies' most recent years' financial statements shows the following results:* Both ECA and CNQ will be profitable in future and continue to generate positive operating cash flows.* Both companies appear to be attractive for investment. Comparatively, CNQ seems to be more attractive just based on the open market price and P/E ratio.* Both companies appear liquid. However, ECA has higher liquid than CNQ.* The activity ratios provide evidence that both companies have a good control of their business components.* The debt, interest coverage, and cash flow ratios indicate that both companies appear to be low long-term solvency risk. Their solvency position supports their growth strategy. The companies have available the resources to grow and respond to competitive pressures.We use FASP to prepare pro forma financial statements, including the projected balance sheet, the projected income statement and the implied statement of cash flows for two companies. Some assumptions were applied in forecasting the two companies' pro forma financial statements. Especially, we assume the sale growth rate in the future for both companies is 5% based on the two companies' historical growth rate , industry environment and the two companies' oil and gas reserves in Canada.The FCFE model was used to valuate the two companies' values based on the pro forma financial statements. We find that:* The value of Encana's stock is around $62, which is just a little bit higher than current price reported as $56.91.* The value of CNQ's stock is around $43, which is just a little bit lower than current price reported as $43.69.Based on the results of our assessment and valuation, we recommend that for risk-love investors it is the time to buy ECA or hold CNQ, and for risk-aversion investors it is better to hold ECA and sell CNQ.2.0 IntroductionThis project analyses will review the strategic position of two Canadian oil and gas exploration and production companies. The chosen companies were Encana Corporation and Canadian Natural Resources Limited. These companies were chosen due to their reputation as progressive, well managed and fast growing companies. These companies will be collectively referred to as the target companies in this report.3.0 Brief Introduction to the IndustryOverview:The oil and gas...

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