Encana to Acquire Oil-Rich Assets, Shares Rise
Exploration and production (E&P) company Encana Corporation (ECA) has entered into an agreement with Freeport-McMoRan Copper & Gold Inc. (FCX) to acquire 45,500 net acres of Eagle Ford properties. Depending on regulatory approvals and some necessary closing conditions, the deal is anticipated to be closed by the last half of second quarter 2014. Encana’s share price rose 4.38% after this $3.1 billion deal was announced.
Despite being a natural gas E&P firm, Encana’s profit was impacted negatively by a fall in natural gas prices in the recent past that made the company restructure its asset base with a focus on oil-producing resources. The latest deal corroborates this shift.
Encana added that during first-quarter 2014, the to-be acquired assets − located at primarily Karnes County, TX – produced about 46,000 barrels per day (bbls/d) of liquids, which represents 75.0% of the total output. The production led to the generation of $327.0 million operating cash flows during the quarter.
The Eagle Ford is North America’s one of the most profitable oil producing resources. Hence, the Encana management believes that the acquisition will double its oil production, and in turn increase cash flows and shareholder returns.
Calgary, Alberta-based Encana is the second largest gas producer in North America, and holds a highly competitive land and resource position in a number of the region's most promising shale and tight gas resource plays. This provides the company with a low risk, long life and sustainable growth profile. We also appreciate Encana’s strategy of disposing assets that do not fit into its long-term growth plan.
However, Encana’s extensive natural gas exposure still raises its sensitivity to gas price fluctuations, compared to its more diversified independent peers with higher oil production.
Encana currently holds a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.
Meanwhile, one can consider better-ranked players in the same industry like Athlon Energy Inc. (ATHL) and RSP Permian Inc. (RSPP). Both the stocks sport a Zacks Rank #1 (Strong Buy).
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