Sector News

Encana to Buy Athlon Energy for $5.93 Billion

September 30, 2014
News
Encana Corp. said Monday it has agreed to acquire Texas shale-oil producer Athlon Energy Inc. for US$5.93 billion in cash, giving the Canadian natural-gas company a large land position in the state’s oil-rich Permian Basin.
 
The friendly deal is the latest in a string of transactions for Encana as it seeks to rebalance its production toward more oil output and improve its bottom line after years of low natural-gas prices. Over the past year, the Calgary-based company has sold off nearly $8 billion in natural-gas assets and used the proceeds to buy about $10 billion in shale-oil properties.
 
The offer for Athlon is at $58.50 a share, a 25% premium to Friday’s close and nearly triple Athlon’s initial public offering price of $20 a share in August 2013. Encana will assume Athlon’s $1.15 billion of senior notes, bringing the deal’s total value to about $7.1 billon.
 
Entering the Midland section of the Permian formation in West Texas will allow Encana to speed up its goal of raising production of oil and natural-gas liquids to half of total output by 2017, up from just 10% last year. Athlon’s assets add 140,000 net acres of land, as well as production of about 30,000 barrels of oil equivalent a day.
 
Encana Chief Executive Doug Suttles expects output from the Athlon assets will increase significantly from that level by 2019. “Our Permian production will grow to between 200,000-250,000 barrels of oil equivalent per day within the next five years and potentially reach even higher levels in the following years,” he said on a conference call.
 
The $7.1 billion price tag amounts to $236,000 per barrel of oil equivalent at current production levels. But given Encana’s view that the assets hold potential production of three billion barrels of oil equivalent, “we bought those barrels at between $2-$3” a barrel, Mr. Suttles said. Based on proven reserves of 173 million barrels of oil equivalent, Encana paid $41 a barrel, according to RBC Dominion Securities Inc.
 
Encana plans to spend $1 billion next year to boost drilling in its newest shale-oil play, which becomes the company’s seventh core area of operations in North America.
 
It is the largest deal so far executed by Mr. Suttles, a former BP BP.LN -0.50%  PLC executive who has moved quickly since taking the helm a little over a year ago to turn around the fortunes of one of Canada’s largest gas producers. Encana’s profit has narrowed as natural-gas prices have plummeted in recent years because of surging North American shale-gas production.
 
Just last week, Encana sold its remaining stake in a company recently created from its royalty income stream. The PrairieSky Royalty Ltd. stake sale, as well as proceeds from the PrairieSky initial public offering in May, raised $3.7 billion. In June, Encana agreed to sell its Bighorn properties in Alberta to Apollo Global Management APO -0.54%  LLC, a private-equity firm, for about $1.8 billion.
 
Apollo helped launch Athlon in 2010 with a $360 million investment and still owns about one-third of Athlon’s shares. The deal with Encana would bring Apollo’s return to about seven times its investment, or about $2.7 billion, including fees and dividends paid to it by Athlon, according to securities filings.
 
Mr. Suttles sees potential that Athlon didn’t. Encana expects to drill as many as 5,000 horizontal wells and anticipates three billion barrels of oil equivalent a day in production potential, which is higher than Athlon’s own projections for as many as 1,850 horizontal wells and 1.4 billion barrels of oil equivalent.
 
With the deal, Encana expects to achieve its target of earning 75% of its operating cash flow from liquids production in 2015, two years earlier than its original estimate.
 
— Ryan Dezember contributed to this article.
 
By Chester Dawson and Carolyn King 
 

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