Calgary-based Encana Corp. (NYSE: ECA) announced Monday morning that it has entered a definitive merger agreement with Athlon Energy Inc. (NYSE: ATHL) to acquire the Texas-based oil company for $5.93 billion in cash ($58.50 per share) and the assumption of approximately $1.15 billion in Athlon’s debt. The Athlon board of directors has unanimously approved the deal, which offers a premium of 28% to Athlon’s 20-day trading price and 25% above last Friday’s closing price.

The acquisition gives Encana a solid position in the Permian Basin with 140,000 net acres in the Midland area. Encana expects that the acquisition will add about 30,000 barrels a day of production. The company also estimates that the potential recoverable resource is about 3 billion barrels of oil equivalent. Encana plans to invest at least $1 billion in the play and to ramp from three to seven horizontal rigs by the end of next year. Encana expects that the Athlon properties will help it reach its total production goal of 250,000 barrels per day by 2017.

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Encana’s CEO said:

During our strategic review last year, we carefully studied North America’s premier basins and identified the massive horizontal, multi-zone, development potential in the Permian. Our strong balance sheet gave us the ability to act and capture this highly value-accretive opportunity. It is early days in the horizontal development of the Permian play and we see tremendous opportunity to enhance and accelerate value by applying our proven resource play model.

Encana has long been viewed primarily as a natural gas producer, but it has adjusted its portfolio in the past year or more to focus more on higher value crude oil. The company now expects to reach its original 2017 target of 75% of operating cash flow from liquids production by 2015.

Athlon’s senior management and Apollo Global Management LLC (NYSE: APO) have agreed to support the merger with their combined stake of 35.8% in the company. Encana will launch a tender offer within 10 days and must receive at least a majority of Athlon shares in order to complete the deal. Other usual and customary reviews must also be completed. The companies expect to close the deal by the end of 2014.

Athlon’s shares were up about 24.8% in premarket trading to $58.21, above the stock’s 52-week range of $26.91 to $51.63.

Encana’s shares were unchanged at Friday’s closing price of $21.13. The stock’s 52-week range is $16.97 to $24.83.

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