Encana Corp. (ECA) has recently acquired Athlon Energy Inc. (ATHL) for a whooping sum 5.93$ billion dollars. This venture has secured a foothold for the company in the Texas oil field with a soaring output after the biggest acquisition of a United States crude & natural gas producer. Encana declared today that the 58.50$-a-share cash purchase represents a 25% premium to Athlon’s closing price from September 26.
Athlon’s Texas-based ‘Forth Worth’ produces approximately 30.000 barrels a day in the Permian Basin in Texas. Its largest shareholder is the private-equity firm Apollo Global Management LLC (APO). Canada’s second-largest gas producer prepares to sell its assets in favor of crude output after having piled over seven billion dollars in cash. Encana split its oil production in a separate company back in 2009, but it is now returning to crude. This happens after the Calgary-based company lowered North American gas prices due to a supply glut.
According to reports from the Energy Information Administration, the Permian Basin has outperformed the Gulf of Mexico in 2013 and it became the most prolific oil-producing region of the United States.
“This fits perfectly with their strategy of best-in-class oil exposure and an asset where they can really drive production growth.” – Greg Dean, fund manager at CI Investments Inc. Toronto
Encana expects to invest approximately one billion dollars in the basin next year, and ultimately increase its production to 50.000 barrels a day. The company knows that this will add 140.000 acres to its portfolio, with a potential recoverable resource equivalent to roughly 3 billion barrels of oil.
“The ultimate success of the deal relies heavily on Encana’s ability to accelerate capital into the play and prove up its resource estimate (…) Transaction metrics appear reasonable but are not cheap.” – Randy Ollenberger, Calgary-based analyst for BMO Capital Markets
In the last seven years, crude production has increased by 60% in the Permian Basin of Texas and New Mexico. This means that the basin is now capable of producing 1.35 million barrels a day, or more. Companies use hydraulic fracturing and horizontal drilling to open on new production.
Encana earned billions by selling its stake in PrairieSky Royalty Ltd. (PSK). This company chargers companies who want to drill on its property. Athlon began public trading for 20$/share in August 2013. The company was formed with the help of CEO Bob Reeves, who served as chief financial officer for Encore Acquisition Co. before it was bought by Denbury Resources Inc. for 4.5 billion dollars.
It is expected that the transaction will be complete by the end of the year.