Did Encana Pay Too Much for Newfield Exploration?

Calgary-based Encana Corp. (NYSE: ECA) announced Thursday morning that it has agreed to acquire Newfield Exploration Co. (NYSE: NFX) in an all-stock deal valued at $5.5 billion, not including the assumption of $2.2 billion in Newfield debt. Newfield shareholders will receive 2.6719 Encana shares for every Newfield share they own. Encana will issue new shares to pay for the acquisition.

Encana holds acreage in the Montney shale play in northern Alberta and in the Permian Basin of Texas. Newfield brings approximately 360,000 acres in prime acreage in Oklahoma’s Anadarko basin to the combined company. According to the announcement, Newfield’s Anadarko acreage includes more than 6,000 gross well locations and about 3 billion barrels of oil equivalent in net unrisked resource. The math indicates Encana is paying around $2.50 a barrel, a reasonable price these days.

Once the transaction is complete, Encana expects that more than half the company’s total output will be in higher-margin liquids. The company is currently a major natural gas producer.

In a separate announcement of third-quarter results, Encana reported daily production of 378,200 barrels of oil equivalent, of which 178,700 barrels are liquids, or about 47% of total production. High-value oil and condensates comprised more than 75% of liquids volumes.

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Newfield, which announced third-quarter results on Wednesday, reported consolidated production of more than 202,000 barrels of oil equivalent per day, of which 62% was liquids. In addition to the Anadarko basin, Newfield has operations in the Williston Basin of North Dakota, the Uintah Basin of Utah and Oklahoma’s Arkoma natural gas play, along with assets offshore of China.

Even though Encana promised to boost its dividend by 25% (it’s now just 1.5 cents per share per quarter) and enlarge its share buyback plan, investors have not been impressed. One complaint seems to be the time it will take for Encana to absorb the acquisition and get everyone singing from the same hymn book. That’s pretty short-sighted it seems to us.

Picking up 3 billion barrels of resource for $2.50 a barrel is an awfully good deal. Even if only half those barrels are economically producible, that’s still a bargain. But shareholders are a notoriously fickle bunch, and with no significant dividend, share price growth is why they’re holding on to the stock. Buybacks won’t make a ton of difference there either. For those willing to hold on for a year or two, the Newfield acquisition looks like a reasonable payday.

The acquisition is expected to close in the first quarter of 2019, and current Encana shareholders will own about 63.5% of the equity in the combined company.

Newfield’s stock traded up more than 10% in the noon hour Thursday, at $22.25 in a 52-week range of $18.67 to $35.20.

Encana stock dropped nearly 16% to trade at $8.63, in a 52-week range of $8.44 to $14.31. The low was posted this morning. The 12-month price target on the stock is $17.33.

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