Encana Pulls Off $7.1B Deal for Athlon in Move Into Permian Basin

HOUSTON (The Deal) -- In its quest to expand with a weight toward oil properties, Canadian oil and gas giant Encana (ECA) said Monday, Sept. 29, it had scooped up Permian Basin player Athlon Energy (ATHL) for $7.1 billion.

The price includes $5.93 billion in cash and $1.15 billion in debt.

Athlon shareholders will receive $58.50 per share in cash, a 25% premium over Athlon's closing price on Friday.

Gabriele Sorbara, an analyst at Topeka Capital Markets, said the price came in at a 8.6% discount to his previous $64 price target. But he estimates Athlon is selling at 8.4 times expected 2015 Ebitda and 6.3 times 2016 Ebitda, 19% and 22% above its peers at 7 times and 5.2 times.

"The acquisition does not come as a complete surprise, as ATHL was one of our top picks given its asset base and execution in the core Midland Basin," he said.

Simmons & Co. International doesn't view the transaction as the beginning of an imminent consolidation wave in the sector. "We believe this transaction was more specific to ECA as the company had the financial wherewithal to do a deal following some recent divestitures and the desire for a transaction which would help accelerate their shift from natural gas to liquids," the firm said. "We continue to expect M&A in the E&P sector to be more company specific - repositioning portfolios, transitioning to oil from gas, etc."

Encana CEO Doug Suttles said on a conference call that the company studied the best unconventional basins as well as the companies operating in those basins and, through its financial adviser, it approached Fort Worth-based Athlon about a deal.

"We believe [it] is a premier Midland basin oil and gas company with 140,000 acres in the core of the core, in the heart of the stack pay potential," he said. "We think there is 3 billion barrel potential ... with a 10 year inventory and a team with a track record of success."

Suttles, an ex-BP plc executive, came on as CEO of Encana a year ago this past summer and, in November, announced plans to sell and spin off assets to pay down debt and focus on higher margin plays. Three months ago, it bought oil properties in South Texas' Eagle Ford from Freeport-McMoRan Copper & Gold Inc. for $3.1 billion.

Encana has also made some grand exits, including the sale of its stake in PrairieSky Royalty Ltd. through an initial public offering for $2.4 billion; its Bighorn assets to Apollo Global Management LLC-backed Jupiter Resources of Calgary for $1.8 billion; and its Jonah properties in Wyoming to TPG Capital LP-backed Jonah Energy LLC for $1.8 billion.

Suttles wouldn't comment specifically on whether the company would look for other assets to buy or sell, but said the company remained interested in "highgrading" its portfolio. "It's something we'll continue to look at it," he said.

Other potential Encana targets have been thought to include Contango Oil & Gas  (MCF) , which has assets in the Woodbine, Eagle Ford and Buda plays; Sanchez Energy  (SN) in the Eagle Ford; and Oasis Petroleum (OAS) in the Bakken Shale. Others include Bill Barrett (BBG) , Bonanza Creek Energy (BCEI) , Energen (EGN) and Penn Virginia (PVA) .

The tender will begin in 10 business days and shareholders have 20 business days to tender their shares. Athlon management, led by Bob Reeves, and Apollo, which took Athlon public last year, have already agreed to tender their shares into the deal, which represent 35.8% of the stock.

The deal requires Hart-Scott-Rodino clearance and closing is expected by year-end.

Encana expects the transaction will add current production of 30,000 barrels of oil equivalent per day based on Athlon's current estimated production including recent acquisitions. Encana sees the potential for 5,000 horizontal well locations with potential recoverable resources of 3 billion barrels of oil equivalent. In 2015, Encana intends to invest at least $1 billion of capital in the play and ramp up from three to at least seven horizontal rigs by year-end 2015. Encana said the Permian will play an important part within its growth portfolio, contributing significantly to its projected total liquids production of around 250,000 barrels per day by 2017. With Athlon, Encana expects to achieve its initial 2017 target to reach 75% of operating cash flow from liquids production in 2015.

Encana tapped Tudor, Pickering, Holt & Co.'s Maynard Holt, Chad Michael and Travis Nichols and Barclays' Jeremy Michael, Tim Kitchen and Chris Watson for financial advice. Paul, Weiss, Rifkind, Wharton & Garrison LLP's Adam Givertz and Andrew Foley, Vinson & Elkins LLP's Shelley Barber and David Cohen and Blake, Cassels & Graydon LLP's Chad Schneider provided legal advice.

Athlon used Evercore Group LLC's Shaun Finnie, Matt Loreman, Doug Rogers, Tim Bonstaff, Sol Jin and Adam Somberg and Goldman, Sachs & Co.'s Suhail Sikhtian, Hank Hilliard and Brian Haufrect. Its legal adviser was Latham & Watkins LLP, including Sean Wheeler, Michael Dillard, Enoch Varner, Kevin Richardson, Alcide King, Ryan Reiffert, Emily Korinek, Sheila Forjuoh, Brock Naeve, Matthew Olson, Craig Kornreich, Pamela Kellet, Tim Fenn, Ana O'Brien, James Cole, Joel Mack, Alicia Handy, David Della Rocca, Adam Kestenbaum, Marysia Mullen, Michael King and Sydney Smith.

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

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