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Encana expects 75 per cent of its operating cash flow to come from oil and natural gas liquids in 2015. CEO Doug Suttles’s original plan was to reach that mark by 2017.TODD KOROL/Reuters

Encana Corp.'s $5.95-billion (U.S.) all-cash acquisition of Athlon Energy Inc. is a major bet on largely undeveloped land in Texas to accelerate the Canadian energy company's shift from natural gas to oil and gas liquids.

Athlon, based in Fort Worth, Tex., controls about 56,656 hectares in Texas's Permian basin, a key region contributing to soaring oil production in the U.S. Encana will also assume $1.15-billion of Athlon's debt.

Encana chief executive Doug Suttles said the deal speeds up Encana's plan to focus on oil and natural gas liquids, which include commodities such as propane and butane, by two years. To make that transition, Mr. Suttles has completed a string of major deals this year, including a $3.1-billion acquisition of properties in the Eagle Ford play, another Texas region with fast-growing oil production.

Analysts were quick to point to the pricey valuation of the latest deal, in light of the modest 30,000 barrels of oil equivalent per day currently produced by Athlon.

"We see it priced at a premium [cash flow] multiple. They are obviously paying for the resource potential. That's it," said Kristopher Zack, managing director and co-head of equity research at Desjardins's Calgary operations. Athlon's property will not produce free cash flow until 2016.

Mr. Suttles stressed the motivation behind the Athlon deal hangs not on the company's current production, but on the opportunity for Encana's drilling techniques to tap more oil than the current operator is.

"What we're doing here is we're buying tremendous potential," Mr. Suttles said. Encana calculates the company's land contains three billion barrels of oil equivalent of potential recoverable resource.

"If you do the math, looking at the purchase price, we bought those barrels between $2 and $3 a barrel of oil equivalent, which we think is a very, very competitive rate."

The U.S. Energy Information Administration in July said the Permian basin is "is the nation's most prolific oil-producing area."

Encana said it intends to spend "at least" $1-billion in the play in 2015. The company now expects 75 per cent of its operating cash flow to come from oil and natural gas liquids in 2015.

Under Mr. Suttles's original plan, the company scheduled to hit this milestone in 2017. About 80 per cent of Athlon's production consists of oil and gas liquids.

"This asset base will be developed largely with horizontal drilling," Mr. Suttles said. "I think they've placed a lot of emphasis on vertical wells."

Encana had previously focused on natural gas, but its results suffered for years amid an industry supply glut and weak prices.

Mr. Suttles is betting Encana will benefit from stronger pricing for oil and gas liquids, but it's too soon to know whether the company's recent acquisitions will be winners.

The takeover addresses what plans Encana had for its big cash pile.

Encana sold the last of its stake in PrairieSky Royalty Ltd. earlier this month for $2.6-billion, and that is on top of the $1.67-billion the parent company collected this spring in PrairieSky's initial public offering. (It was the largest Canadian IPO in 14 years).

Encana in June announced a deal to sell its Bighorn assets for $1.8-billion; it closed the $1.8-billion sale of its Jonah operations in May; and disclosed a divestiture worth roughly $530-million worth of assets in Texas in April.

While investors like to see companies flush with cash – especially those going through turnarounds – investors were anxiously wondering how Encana would put its cash to use.

"At least now they are happy it is done," said Laura Lau, a senior vice-president and portfolio manager at Toronto's Brompton Funds.

Her funds have not invested in Encana.

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 0:33pm EDT.

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+2.81%1.0898

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