Encana Corp.'s $5.9-billion (U.S.) takeover of Athlon Energy Inc. looks pricey and, by some measures, it is.
Stacked up against other recent deals in the Permian Basin of Texas, one of the most prolific U.S. shale gas and oil regions, it sets a new high on a standard acquisition metric – price per daily barrel of production. It runs a close second on price per barrel of proved reserves, another often-used yardstick.
The attraction for all that money is what Encana says it can do with those assets in terms of boosting output as a new main operating region and bringing more of the oil- and condensate-rich reserves into the proved reserve category through drilling.
Encana chief executive Doug Suttles uncorked the deal on Monday, answering a burning question among investors and analysts: What did the company have in mind for more than $6-billion in proceeds from asset sales and the spin-off of PrairieSky Royalty Ltd.? Encana completed $2.6-billion (Canadian) secondary offering of the remainder of PrairieSky last week.
Based on Athlon's production of 30,000 barrels per day, the deal works out to a fat $235,383 (U.S.) per barrel of output, according to Menno Hulshof, analyst at TD Securities. That's the most a company has paid per production unit in the Permian in the last year, according to figures from IHS, even amid the rush of transactions in the region in the past 12 months.
In a $259-million deal in July, RSP Permian Inc. plunked down $234,000 per flowing barrel for properties. The next highest was $192,000 per flowing barrel, in a $165-million acquisition of Pacer Energy Ltd. properties by Parsley Energy LLC.
Encana's purchase pegs Athlon's proved reserves at $40.82 per barrel of oil equivalent, according to Mr. Hulshof. That's just behind $41.58 paid by Diamondback Energy Inc. for assets in a $174-million transaction. Athlon's own $382-million buy of Eagle Energy Trust assets last year went for $34.73 a barrel.
The Permian, known for "stacked zones" – that is, several thick intervals of oil- and gas-bearing rocks – is definitely not the U.S. oil industry's low-rent district. By contrast, Encana paid around $58,000 per flowing barrel in its $3.1-billion purchase of assets from Freeport-McMoran Copper & Gold in May. Those are located in the Eagle Ford, another Texas shale play. Both are close to major markets.
"On all the traditional metrics, it looks quite expensive, and yet the stock's up," says FirstEnergy Capital Corp. analyst Michael Dunn. "What does that tell you? It tells you that on a risk-to-net-asset-value basis, people like the deal. The key to this deal is there's a huge amount of potential [drilling] inventory here."
This is what the industry in-crowd likes to call running room. Mr. Suttles said Encana's identified 5,000 potential drilling locations and plans to spend $1-billion on the lands next year.
There's a key aspect that needs mentioning here – Athlon's drilling has been largely of the vertical variety. Encana stands to gain much by employing its expertise in horizontal drilling, which means much more production per well.
Another big draw is the makeup of the production. Eighty per cent of it is oil and natural gas liquids, which fetch much more in the market than dry gas. It all helps Encana derive three-quarters of its cash flow from those products by 2015, two years earlier than Mr. Suttles's initial target.
Jeffrey Jones