Skip to main content

Encana Corp. is paying US$5.5-billion to add a new American oil-production region to its operations, saying the deal will lead to higher dividends and share buybacks.

But the move sparked a heavy sell-off, as investors worried that Encana, which has spent years pruning its operations, is entering a new region with its stock at a weak point, and paying for it with shares. Encana tumbled 13 per cent on Thursday

Encana is buying Houston-based Newfield Exploration Co., giving it a sizable foothold in an Oklahoma shale play known as the Stack/Scoop. It would become Encana’s third major U.S. operating region after the Permian and Eagle Ford areas of Texas, sites of drilling booms.

Story continues below advertisement

Newfield shareholders will get 2.6719 Encana shares for each Newfield share. Encana will also assume US$2.2-billion of Newfield debt.

The purchase will boost Encana’s production by more than 50 per cent to 577,000 barrels of oil equivalent a day. It can employ the same high-tech drilling technology the company has been successful using in its other operations, chief executive Doug Suttles said. He told analysts that Encana has watched the play develop since he became CEO five years ago.

“If you go all the way back to our strategy work in 2013, we identified this as a basin that was going to be a premium basin. We think it’s ready to take off, and it fit well with us,” Mr. Suttles said.

Encana said it plans to raise its dividend by 25 per cent next year, and increase the amount it has earmarked for buying back shares to US$1.5-billion. Given that it will be issuing 535 million shares to pay for Newfield, the buyback sends a mixed message. Canadian Imperial Bank of Commerce analyst Jon Morrison called that aspect “perplexing.”

Newfield also has smaller operations in North Dakota and Utah, though those are not key to future expansion for Encana, Mr. Suttles said. Instead, it will concentrate on the Oklahoma assets, along with its Texas oil production and liquids-rich natural gas in the Montney and Duvernay regions of Alberta and British Columbia.

The deal surprised investors. Encana has sought to sharpen its focus by concentrating on four very large plays, and jettisoning those with lesser prospects. In recent years, it had settled on the four in Canada and the United States. It used proceeds from asset sales to pay down debt as the industry downturn dragged on.

It does not appear that Encana is overpaying for Newfield; the larger concern is that it is straying from its strategy to an area where it has no current presence, which limits operating savings, said Eric Nuttall, senior portfolio manager at Ninepoint Partners. Encana said it expects to save US$250-million annually, though that includes general and administrative costs.

Story continues below advertisement

The deal comes after weeks of steep declines in the shares of oil producers, including Encana and Newfield. With Thursday’s steep drop, Encana is down 33 per cent in the past month. In the same period, U.S. benchmark crude has fallen 16 per cent.

“At best, they now need to prove that they can right the [Newfield] ship with their operational expertise, which will take two to three quarters, a long time for the market to wait in a [weak] energy market,” Mr. Nuttall said.

The deal would mean Encana derives a much larger proportion of its revenue from the United States, raising questions about the Calgary-based company’s long-term aims for Canada. Earlier this year, Mr. Suttles relocated to the company’s Denver office. He said on Thursday the new assets will be run from Newfield’s office in Houston.

“We call it a headquarterless model. We’ll have three locations: Calgary, Denver and Houston, and actually the work happens where the people are, as opposed to the opposite,” he said.

Encana reported third-quarter profit of US$39-million, or four cents a share, down from year-earlier US$294-million, or 30 cents. The most recent figure included a non-cash hedging charge of US$164-million. Production rose 33 per cent to 378,200 barrels of oil equivalent a day.

Liquids assets:

Encana adds new plays

Montney

22% liquids

New stake

201 MBOE/D

Existing

holding

Duvernay

43% liquids

16 MBOE/D

Williston

86% liquids

Uinta

84% liquids

21 MBOE/D

19 MBOE/D

STACK/SCOOP

60% liquids

144 MBOE/D

Arkoma

81 MMCF/D

Permian

85% liquids

Eagle Ford

82% liquids

99 MBOE/D

50 MBOE/D

THE GLOBE AND MAIL, SOURCE: encana

Liquids assets: Encana adds new plays

Montney

22% liquids

New stake

201 MBOE/D

Existing

holding

Duvernay

43% liquids

16 MBOE/D

Williston

86% liquids

Uinta

84% liquids

21 MBOE/D

19 MBOE/D

STACK/SCOOP

60% liquids

144 MBOE/D

Arkoma

81 MMCF/D

Permian

85% liquids

Eagle Ford

82% liquids

99 MBOE/D

50 MBOE/D

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: encana

Liquids assets: Encana adds new plays

Montney

22% liquids

New stake

201 MBOE/D

Existing holding

Duvernay

43% liquids

16 MBOE/D

Williston

86% liquids

Uinta

84% liquids

21 MBOE/D

19 MBOE/D

STACK/SCOOP

60% liquids

144 MBOE/D

Arkoma

81 MMCF/D

Permian

85% liquids

Eagle Ford

82% liquids

99 MBOE/D

50 MBOE/D

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: encana

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies