We are seeing a flurry of merger mania in the American oil and gas sector. Today’s deal sees Encana snapping up Newfield Exploration for $5.5 billion in equity and $2.2 billion of assumed debt. Like Chesapeake Energy’s $4 billion buy of WildHorse on Tuesday, the news was a surprise to investors. Encana shares are off 15% today.
The industry is clearly in a consolidation trend. In recent months we’ve seen BP grab BHP Billiton’s Lower 48 business for $10.5 billion. Diamondback Energy bought Energen for $9.2 billion and Ajax Resources for $1.2 billion. Denbury acquired Penn Virginia this week for $1.7 billion. And Chesapeake Energy announced Tuesday its deal for WildHorse for $4 billion.
And according to Tudor, Pickering & Holt’s morning note today, the merger mania has only just begun. “Our thesis on this topic is fundamentally grounded in the view that shale has matured and as such companies look to industry consolidation to gain scalable cost synergies and inventory. All of this is a healthy (and necessary) evolution in the upstream space.”
Yesterday we looked at the Chesapeake deal for WildHorse, which provided a bolt-on opportunity in the Eagle Ford. In contrast, the Encana/Newfield deal does the opposite. The two companies have no portfolio overlap.
Encana, which started its life as a Canadian company, began an evolution in 2013 when CEO Doug Suttles joined from BP. He has been selling off Canadian assets and U.S. gas fields in favor of oil fracking opportunities in the U.S. It bought Permian-focused Athlon Energy at the top of the market in 2014 for $5.9 billion. Encana now has core areas in the Permian and Eagle Ford in Texas and the Montney and Duvernay gas plays in Alberta. It’s one of the top 10 oil producers in Texas, flowing nearly 100,000 bpd out of total production of about 360,000 bpd per day.
Newfield brings a fast-growing core position in the Stack play of Oklahoma, a Bakken operation, and exploration acreage in Utah. Production volumes are running about 180,000 bpd per day. The company is in solid financial shape following a 2015-2016 recapitalization in which it sold $1.6 billion in new stock.
While Encana is the bigger operator, Newfield is more profitable, generating $827 million in operating income and $429 million in net income over the past nine months. Encana over nine months did $340 million in operating income, $39 million in net income and bought back $250 million worth of shares. The combined companies will have $6 billion in long-term liabilities and produce 540,000 bpd.
Neither Suttles nor Newfield CEO Lee Boothby have much of a shareholding in their companies. Suttles shares are worth about $900,000 while Boothby has about $3 million. Newfield shares hit $47.82 in late 2016 but now are at $22.50, up 11% on the day. Encana shares peaked around $24.50 in June 2014 and now go for $8.65, down 15.5% today, as investors wonder what they’ve gotten into.
The Tudor, Pickering crew notes several other oil names worth watching as the consolidation wave continues, including: Carrizo Oil & Gas (CRZO), with operations in the Permian and Eagle Ford; Oasis (OAS), focused on the Bakken; Permian-based and recently recapitalized Laredo Petroleum (LPI) and QEP Resources (QEP), in the Bakken, Permian and Haynesville.