Encana Purchase of Athlon Shows Strength of Oil, Weakness of Gas

NEW YORK (TheStreet) -- Encana's (ECA) announcement that it will buy Athlon Energy (ATHL) for $5.93 billion, or $58.50 per share, plus debt illustrates that the move away from natural gas and toward oil that began almost five years ago is accelerating.

Athlon might have been willing to sell because oil production in prime U.S. fields is now exceeding the capacity of infrastructure to take it to market, and could soon exceed Gulf Coast refining capacity, leading to an increased call for crude exports.

Morningstar analyst David Meats says the $29,000 per net acre paid by Encana for Athlon leases, after backing out current production, may be "a little on the high side," given other recent deals in the play, but "it's not so high that it seems an overpayment. I think both parties walk away pretty happy." He calls it a "great strategic move for ECA."

Encana's press release on the deal says it now has a "premier oil position in the Permian" basin. Encana also bought assets recently in the Eagle Ford oil play in south Texas.

Natural gas prices plunged in 2011, reaching a low of slightly more than $2 per a thousand cubic feet in 2012 before rebounding to nearly $5 early this year, but they have since fallen back to about $4.

As the first wave of selling in natural gas hit, fracking pioneers such as Chesapeake Energy (CHK) began selling gas deposits in the eastern U.S. in favor of oil-rich properties. That trend is now accelerating. The Energy Department recently approved construction of two additional gas export terminals alongside one now being built by Cheniere Energy (LNG) , which is due to open in 2016.

Encana, which is based in Calgary and calls itself the second-largest gas producer in North America, spun out Canadian gas lease holdings under the name Prairie Sky Royalty (PSK) early this year, then sold all its interest in that company early this month, giving it the cash to make the Athlon bid.

Athlon is a Permian Basin producer of oil and natural gas liquids; its production rate is estimated at the equivalent of 30,000 barrels per day.

Before the Encana announcement, Athlon was on a roll with analysts. It won a buy rating from Barclays just two weeks ago, and was upgraded by Bank of America (BAC) analysts at the same time, after Encana made a presentation at Barclays' energy conference in New York.

Analysts at KLR Group and Deutsche Bank also released positive research notes on Athlon in mid-September with price targets of $60 a share, slightly more than the price Encana is paying. Tudor Pickering had begun the rush to upgrade Athlon in August and acted as an Encana adviser on the purchase.

Shares of Athlon were up almost 25% at $58.22 just before 11 a.m. EDT Monday. Shares of Encana were changing hands 2.8% higher at $21.73.

The fear now is that the glut in natural gas may start extending to some parts of the oil patch. The Energy Information Administration noted last week that a spread has been developing between prices for oil paid in Midland, Texas, at the heart of the Permian, and the price paid in Cushing, Okla., a terminal with access to Gulf coast refineries. The price for West Texas Intermediate at Midland has been significantly lower than the price at Cushing.

That spread reached nearly $10 a barrel recently, and the discount amounts to $12.50 a barrel when pipeline transit costs are taken into account. That should narrow as new pipelines across Texas come on-stream, however.

At the time of publication the author owned shares in BAC. 

Follow @danablankenhorn

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.


TheStreet Ratings team rates ATHLON ENERGY INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate ATHLON ENERGY INC (ATHL) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its solid stock price performance, robust revenue growth and good cash flow from operations. However, as a counter to these strengths, we find that the growth in the company's net income has been quite unimpressive."

You can view the full analysis from the report here: ATHL Ratings Report


TheStreet Ratings team rates ENCANA CORP as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:

"We rate ENCANA CORP (ECA) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its good cash flow from operations, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we find that the growth in the company's net income has been quite unimpressive."

You can view the full analysis from the report here: ECA Ratings Report

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