Why Encana Corp. acquired Athlon Energy for $7.1 billion

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Oct. 7 2014, Published 2:42 p.m. ET

The deal

On September 29, Encana Corporation (ECA) and Athlon Energy Inc. (ATHL) announced a friendly merger. All of ATHL’s issued and outstanding shares were acquired by ECA. ECA is based in Calgary, Canada. ATHL is based in Fort Worth, Texas.

ECA-ATHL - P1

Details

ATHL shares will be acquired by ECA for $5.93 billion in cash—at $58.5 per share. This is a 25% premium to Athlon’s closing of $46.73 the previous day. ATHL shares have traded at close to these levels since the announcement.

Encana will also assume $1.15 billion of Athlon’s debt. This brings the total deal value to just under $7.1 billion. ECA shares were also given a thumbs-up by the market. ECA shares had a ~2.2% bump after the announcement.

ATHL’s board of directors has a responsibility to maximize shareholder value. The board recommended that ATHL shareholders accept ECA’s offer. This is why the deal can be called “friendly.” The deal is expected to close by the end of this year.

What Encana Corp. will get

ECA will get Athlon’s ~140,000 net acres. It will get ~30,000 barrels of oil equivalent per day (or boepd) production in the liquids-rich Midland Basin. Approximately 80% of the barrels are liquids.

The Midland Basin forms the eastern part of the larger Permian Basin.

The acreage is spread over Midland, Martin, Howard, Glasscock, and other counties in Texas. It’s estimated to hold ~173 million barrels of oil equivalent (or MMboe) in proved reserves. The reserves are estimated to be recoverable with a high degree of certainty.

This translates into a price of ~$51,000 per acre, or ~$41 per barrel of proved reserves.

ECA estimates the assets hold approximately three billion boe of potentially recoverable resources. This would mean it paid ~$2.4 per boe. This assumes that ECA will be able to extract all of this oil and gas in the future.

The Permian

The Permian Basin has been a hot region for energy deals lately. Check out our analysis of the recent asset swap deal between ExxonMobil (or XOM) and LINN Energy (or LINE) here.

Key exchange-traded funds (or ETFs)

ETFs are a great way for investors to gain diversified access to the booming U.S. energy sector. These include the Energy Select Sector SPDR (XLE), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and the iShares Dow Jones US Energy Sector ETF (IYE).

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