Morningstar | Encana Agrees to Acquire Newfield Exploration
No-moat Encana agreed to acquire all of the outstanding shares of Newfield Exploration, in an all-stock deal valued at $5.5 billion. Under the agreement, Newfield shareholders will receive 2.67 shares of Encana stock, and Encana will assume $2.2 billion of Newfield’s net debt. After the deal closes, management expects to increase its dividend by 25% and increase the share buyback program by $1.5 billion. The current plan sits at $400 million. Management also expects $250 million of annual synergies as a result of the acquisition.Management believes that the combined company would have generated 577 thousand barrels of oil equivalent per day during the third quarter, compared with Encana’s production of 378.2 mboe/d. The combined company will operate in the Permian, STACK/SCOOP, and Montney basins, with liquids contributing over 50% of the production.
Encana reported third-quarter production of 378.2 mboe/d, slightly below our expectations. The lower-than-expected production was driven by a slower ramp-up of the company’s planned drilling production.
The stock is down 15% on the news of the acquisition and remains in 3-star territory for now. We intend to incorporate these financial and operating results into our model shortly, but our $12 (CAD 15) fair value estimate and no-moat rating are unchanged for now.
Encana is in the business of the exploration for, the development of, and the production and marketing of natural gas, oil and natural gas liquids (NGLs). All of Co.'s reserves and production are located in North America. As at Dec. 31, 2016, total proved developed and undeveloped reserves for natural gas, oil, and NGLs were 2.90 billion cubic ft., 155.6 million barrels (MMbbls), and 150.4 MMbbls, respectively. Co.'s operating and reportable segments are: Canadian Operations, USA Operations, and Market Optimization.
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