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.

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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.

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