Deal positions Encana in oil-rich Permian
Encana Corp. (TSX, NYSE: ECA) and Athlon Energy Inc. (NYSE:ATHL) have entered into a definitive merger agreement. Encana will acquire all of the issued and outstanding shares of common stock of Texas-based Athlon for $5.93 billion in cash, as well as the company’s $1.15 billion of senior notes, for a total transaction value of approximately US$7.1 billion.
Like many oil and gas exploration and production companies in recent years, Calgary-based Encana has worked to realign its portfolio—divesting natural gas-weighted assets to acquire and development higher-margin oil and natural gas liquids (NGLs) opportunities.
With the acquisition, Encana adds approximately 140,000 net acres in the oil-rich Midland Basin counties of Midland, Martin, Howard, and Glasscock to its portfolio.
By Wunderlich Securities estimates, the quality acreage justifies the price. “With a Midland comp group valuation of $105,000/flowing barrel and ATHL's production of 30,000 boepd, we value ATHL's production at $3.15 billion. This implies that ECA paid ~$3.9 billion for the 140,000 net acres or $28,245/net acre, a record. If we use $130,000/flowing barrel, the price paid for the land would be $22,857/net acre, still a large number; but we believe that the multi-pay potential proven in the Midland Basin justifies these valuations,” noted the analysts.
"The Athlon team has built an exceptional asset with massive running room that includes greater than 10 years of drilling inventory with up to 11 potential productive horizons of high-margin liquids,” said Doug Suttles, Encana president and CEO.
In the eyes of Encana, that running room includes approximately 5,000 horizontal well locations and 3 billion boe of net reserve potential—a significant increase from Athlon’s pre-offer numbers estimate of approximately 1,850 horizontal well locations and 1.4 billion boe of 3P reserves. While these numbers differ, both companies recognize the potential.
Prior to the deal, Athlon was set to increase its rig count in the play from three to six by 2Q15. Encana sees the rig count increasing to seven by year-end 2015. Athlon set a 2014 capital budget of $700 million. Encana plans to increase the budget for 2015 to $1 billion.
“It is early days in the horizontal development of the Permian play and we see tremendous opportunity to enhance and accelerate value by applying our proven resource play model,” Suttles said.
The Permian will play an important part within Encana's growth portfolio, contributing significantly to company-wide projected total liquids production of around 250,000 barrels per day (bbls/d) by 2017.
Following this oil-rich acquisition, Encana now expects to achieve its initial 2017 target to reach 75% of operating cash flow from liquids production in 2015.
The transaction has been unanimously approved by the board of directors of both Encana and Athlon. Subject to certain conditions, Athlon's senior management, as well as funds affiliated with Apollo Global Management LLC, have agreed to tender their shares, which on a combined basis represents approximately 35.8% of Athlon shares on a fully diluted basis.
Under the terms of the merger agreement, Athlon shareholders will receive cash consideration of US$58.50 per share, which represents a premium of 28% over the average trading price of Athlon stock for the last 20 days and a 25% premium over the trading price of Athlon stock at market close on Friday, September 26.
Encana is being advised by Tudor, Pickering, Holt & Co. and Barclays as financial advisors and Paul, Weiss, Rifkind, Wharton & Garrison LLP, Vinson & Elkins LLP, and Blake, Cassels & Graydon LLP as legal advisors. Athlon is being advised by Evercore Group LLC and Goldman, Sachs & Co., as financial advisors, and Latham & Watkins LLP, as legal advisor.