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Encana seizes Permian target
Encana has emptied out its piggybank and rolled the dice in its biggest play for years in the North American oil and natural gas casino.
In deal funded almost exclusively with cash on hand, the Calgary-based company has offered US$7.1 billion (including US$1.1 billion of assumed debt) to acquire Athlon Energy and take a big stride towards remaking itself from North America’s one-time leading gas producer to a liquids leader.
The objective is a long way from done and Chief Executive Officer Doug Suttles is remaining tightlipped about what, if anything, is next on Encana’s shopping list.
But, if the Athlon offer is closed as scheduled by year-end 2014, the company will add the Permian basin of West Texas to what it views as stakes in North America’s top tier unconventional resource plays, having already secured positions in the Eagle Ford and Western Canada’s Montney and Duvernay formations.
The Athlon assets include 140,000 net acres (with a 90 percent working interest), 5,000 potential gross horizontal well locations, or 10 years of inventory, and a net resource potential of 3 billion barrels of oil equivalent.
Current production from the properties is 30,000 barrels of oil equivalent per day (60 percent oil, 20 percent natural gas liquids and 20 percent natural gas), which Suttles said Encana plans to increase to an average 50,000 boe per day in 2015 through capital spending of US$1 billion.
It also hopes to generate a netback of US$50 per boe, based on West Texas Intermediate prices of US$90 per barrel and Nymex gas prices of US$4 per thousand cubic feet.
The company is forecasting the Permian holdings will contribute an average 200,000-250,000 boe per day by 2019, with liquids accounting for 50 percent of corporate production in 2017, of which oil will be 75 percent.
Towards that end, Encana said it aims to replace low-margin natural gas production with high-margin liquids as its total production grows by about 3 percent a year in the 2013-17 period.
Grandfather a pioneer Suttles, the third generation oilman in his family, indicated sentiment may have played a role in the decision to bid for Athlon, noting that his grandfather was a pioneer in the Permian in the 1930s.
Asked if any consideration had been given to the Bakken, he said that as Encana “looked across North America as part of our strategy,” deploying a new team whose mission is to “own tomorrow’s portfolio.”
He said that over the past year that unit studied a number of “what we consider to be the best unconventional basins in North America - the Eagle Ford and Permian being two of those. We also looked carefully at the Bakken.”
Some analysts noted during conference calls that Encana estimated the new assets were triple those listed by Athlon, to which Suttles said Athlon had placed most of its emphasis on drilling vertical wells, while Encana plans to advance the use of horizontal wells and multiwell pad development.
The company said it has a “tremendous opportunity to enhance and accelerate value by applying our technical expertise.”
‘Resource-play hub model’ Without saying why the Bakken missed out in the selection process, Suttles said Encana puts its emphasis on creating value by using its “resource-play hub model” which includes pad drilling and integration of facilities, “things we’ve done numerous times, very effectively.”
The company’s war chest for the Athlon move has been deftly accumulated since Suttles moved into the top job in mid-2013, starting with the spinoff of freehold royalties in southern Alberta, launching PrairieSky Royalty for proceeds of US$4.3 billion, then only three months later jettisoning the remaining stake for US$2.6 billion.
It was a key move in Suttles’ dramatic strategy to lay out a new course for Encana, which had been sucked into a natural gas price whirlpool, punished for its ill-timed decision to spin off liquids production to create Cenovus Energy and steered astray by what he described as a scatter-shot approach to capital spending in numerous operating regions.
With its pockets bulging, Encana was being closely watched for a power play, which observers narrowed down to about four options - share buybacks, increasing its stake in the Duvernay and, despite high prices and scarce opportunities, a move on either the Bakken or the Permian.
The Permian is a “transformative acquisition (that) further accelerates our strategy and provides us with a prime position in what is widely acknowledged as one of North America’s top oil plays,” Suttles said, suggesting the corporate turnaround is two years ahead of schedule.
“Our portfolio now aligns with our vision of being a leading North American resource play company,” he said.
The surprise for outsiders was that Athlon had given no indication it was for sale at a time when it was growing, had a strong cash position and was raising guidance. But the acquisition offer was at a 25 percent premium over Athlon’s trading price on the previous trading day.
David Meats, an analyst with Morningstar, said the deal is “pretty exciting ... it’s a very high quality asset and a perfect strategic fit. The price seems pretty reasonable, perhaps a little bit on the high side, but with huge potential.”
- Gary Park
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