Encana Corporation (ECA) announced that it has entered into an agreement to acquire the Texas-based oil producer, Athlon Energy Inc. (ATHL). The Canadian energy explorer will pay $7.1 billion for the deal, which includes assumption of $1.15 billion of Athlon’s debt. The remaining cash consideration of $5.93 billion would be spent in acquiring Athlon’s stock at $58.50 per share. The deal is expected to close by the end of 2014.
Investors reacted positively to this announcement. The stock of Encana gained over 2% to close at $21.59 while Athlon’s shares surged nearly 25%, closing at $58.32.
The transaction would add about 140,000 net acres in the Midland Basin, the seventh addition in Encana’s oil-rich asset portfolio after Montney, Duvernay, Eagle Ford, DJ basin, San Juan basin and Tuscaloosa marine shale.
Management at Encana stated that the assets hold over 10 years of drilling inventory in one of the most lucrative oil plays in North America. The Permian region is anticipated to play an important role in the company’s growth plans, contributing significantly to Encana’s 2017 anticipated liquid-production plan of 250,000 barrels per day.
With over 5,000 possible horizontal well locations, Encana expects recoverable resource of about 3 billion barrels of oil equivalent (boe). The company anticipates production of approximately 30,000 boe/day (about 80% liquid) from the properties based on Athlon’s current assumptions. As of second-quarter 2014, Athlon had 1,121 vertical and 17 horizontal wells with proved reserves totaling 173 MMBoe.
Encana added that it plans to invest over $1 billion in this play and increase the horizontal rig count to at least 7 from the current 3 rigs by the end of next year.
This acquisition is another step in Encana’s strategy of moving away from natural gas associated assets to liquid-linked acreage addition. The company has already sold natural gas assets worth about $8 billion and acquired nearly $10 billion in oil-related properties. The deal is expected to be immediately accretive to the company’s cash position. Further, Encana expects to become cash flow positive by 2016.
Calgary, Alberta-based Encana, the second largest gas producer in North America, currently carries a Zacks Rank #3 (Hold).
Meanwhile, one could consider better-ranked players from the oil and gas exploration and production industry like Northern Oil and Gas, Inc. (NOG) and WPX Energy, Inc. (WPX). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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