Natural gas producer Encana Corp. is acquiring Texas-based Athlon Energy Inc. in a $5.93-billion (U.S.) deal aimed at speeding the company's move into oil liquids.
The Canadian company will also absorb Athlon's debt, which values the deal at $7.1-billion, according to a statement released Monday.
The deal gives Encana a stake in the Texas Permian basin, an oil-rich zone the company said it has been studying since last October. For Encana, the proposed acquisition is about buying potential rather than existing production.
Encana chief executive Doug Suttles said the deal speeds up his company's strategic makeover by about two years. The company now expects 75 per cent of its operating cash flow will come from liquids, such as oil and propane, in 2015. Under Mr. Suttles' original strategic plan, the company was not scheduled to hit this milestone until 2017.
"We are solely focused on unconventional resource plays in North America," Mr. Suttles said in a conference call. "That's all we do."
Encana has completed a string of multibillion-dollar deals to get to this position. It raked in over $4-billion by spinning off a new company, PrairieSky Royalty Ltd., and quickly selling its stake in the outfit when the market proved hot. PrairieSky controls roughly 5.2 million acres of so-called royalty-free land. Encana, in May, spent $3.1-billion to buy land in Texas' Eagle Ford play.
The Athlon acquisition gives Encana seven areas of focus. The others are the Eagle Ford; the Montney in northeast British Columbia and northwest Alberta; the Duvernay in west central Alberta; the DJ Basin liquids play in Colorado; San Juan oil zone in northwest New Mexico; and the Tuscaloosa marine shale in Mississippi and Louisiana. (Mr. Suttles' original plan was to focus on the last five plays. Encana had previously been spending money in about two dozen areas in North America).
Permian production hit nearly 1.7 million barrels per day in August, according to U.S. government data. That's up more than 300,000 b/d from a year ago.
So much oil is flowing out of the energy play that production is outpacing available pipeline infrastructure to move the crude to refineries, contributing to regional price discounts, the U.S. Energy Information Administration said this month. Recent outages at refineries in the region and along the U.S. Gulf Coast saw the West Texas intermediate price at Midland, Tex. fall to a record $17.50 (U.S.) under the price at Cushing, Okla., the key U.S. storage hub. A series of planned pipeline expansions will help narrow the gap, the agency said.
Encana has offered to buy Athlon's shares for $58.50 each. The American company's shareholders must approve the deal. The offer price is 25 per cent higher than Athlon's closing price Friday.
Athlon is trading just below the offer price Monday morning, a hint investors believe the deal will happen – and that a competing bid will not surface.
Encana plans to spend about $1-billion in the Permian in 2015 and said the zone will be "self-funding" by 2016. Roughly 140,000 acres of land are changing hands in the deal.
The acquisition gives Encana another 30,000 barrels of oil equivalent per day. Roughly 60 per cent of this is oil production; 20 per cent is natural gas liquids, which are commodities like propane and butane; and 20 per cent natural gas, Encana said.
The play will "play an important part within Encana's growth portfolio," the company said, as it aims to produce 250,000 barrels of liquids per day by 2017.
Morningstar Inc. analyst David Meats said Athlon looks like a win for Encana.
"It's a pretty exciting deal. It's a very high quality asset they bought and a perfect strategic fit, concentrated in liquids," he said in an interview.
"The price seems pretty reasonable, perhaps a little bit on the high side but with huge potential."