ENCANA & ATHLON: $7 BLN
Encana of Canada has become the latest company working in North America's shale reserves to make a leap to reduce its reliance on gas, and increase its oil production, by agreeing a $7.1bn deal to buy US-listed Athlon Energy.
The deal unveiled yesterday is worth $58.50 per share in cash – almost three times the price of $20 that Athlon floated at last year.
Under Doug Suttles, who was appointed as Encana's chief executive in June 2013, the Canadian group had been moving to develop its more lucrative oil business.
The profitability of its gas production – which accounted for 90 per cent of its output by energy content last year – has been hit by weak prices, sending its shares down by three quarters from their peak in June 2008.
Buying Athlon, which is based in the booming oil region of the Permian Basin of west Texas, is expected to raise Encana's production of oil and related liquids such as ethane to 45-50 per cent of its output by 2017, up from just 10 per cent last year.
Mr Suttles described the deal as a "transformative acquisition".
The move was received positively by the stock market, and by late morning in New York Encana's shares were up 2.5 per cent at C$24.15.
Many other companies, from the giant ExxonMobil down to small exploration and production firms, have been making similar moves in US shale, shifting drilling rigs and other resources away from gas and into oil.
The shale revolution has created volatility in the industry, paying off with great success for some companies and failure for others.
Sumitomo Corp of Japan revealed on Monday it had become the latest non-US company to lose money in its investments in shale, taking a $1.6bn writedown on its assets in the Permian region.
Athlon was founded in August 2010, and was early to identify the potential of the Permian Basin, where there are several stacked layers of oil-bearing rocks that can be developed, including formations known as Wolfcamp and Spraberry.
Athlon's estimated reserves increased by 48 per cent last year to 127m barrels of oil equivalent at the end of 2013.
Apollo Management, the fund that first backed Athlon, still has a 25.9 per cent stake, and will gross about $1.47bn from the deal.
The deal terms value Athlon's equity at $5.93bn, and Encana is also taking on $1.15bn of debt.
The offer price gives a 25 per cent premium to Athlon's closing price of $46.73 on Friday.
Encana said it intends to invest at least $1bn in the Permian Basin once the deal goes through. Athlon's board is recommending the transaction to its shareholders.
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U.S. EIA - In December 2018, U.S. shale and tight plays produced about 65 billion cubic feet per day (Bcf/d) of natural gas (70% of total U.S. dry gas production) and about 7 million barrels per day (b/d) of crude oil (60% of total U.S. oil production). A decade ago, in December 2008, shale gas and tight oil accounted for 16% of total U.S. gas production and about 12% of U.S. total crude oil production.
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U.S. FRB - Industrial production decreased 0.6 percent in January after rising 0.1 percent in December.