(Reuters) – Canada’s largest natural gas producer Encana Corp said on Monday it has agreed to buy Athlon Energy for US$5.93 billion in cash, as it accelerates its plan to focus on more lucrative oil and natural-gas liquids (NGLs).
The deal, which gives Calgary-based Encana control of about 140,000 net acres in the oil-rich Permian Basin in Texas, adds another core region to the six shale fields where Encana is concentrating its spending.
The takeover will lead to a huge payday for Apollo Global Management. Athlon was formed in 2010 with the backing of the U.S. private equity firm that still owns over 30 percent of the company’s stock, according to Thomson Reuters data. Fort Worth, Texas-based Athlon, which was taken public back in August 2013, raised just over US$300 million via its initial public offering (IPO).
The IPO priced at US$20 at the time and the stock began trading at US$26 a share. The offer price of US$58.50 per share is a nearly threefold increase on the price at which the company went public, and also represents a premium of 25 percent to Athlon’s closing price on Friday. Athlon shares were trading just below the offer price at US$58.16 before the opening bell.
Athlon has been focused on the acquisition and development of unconventional oil and liquids-rich natural gas reserves in the Permian Basin, which spans portions of Texas and New Mexico and consists of three main sub-basins: the Delaware Basin, the Central Basin Platform, and the Midland Basin. Athlon’s assets are located mainly in the northern part of the Midland basin. Athlon produces about 30,000 barrels of oil equivalent per day (ob/ed).
With the deal, Encana now expects to achieve 75 percent of operating cash flow from liquids production in 2015, two years ahead of its earlier projection. In the past year, Encana has significantly realigned its portfolio via divestitures of natural gas-weighted assets and the acquisition of higher-margin oil and natural gas liquids.
The company sparked a flurry of speculation among analysts that it was eyeing a large takeover after it moved quickly early this month to sell its remaining stake in PrairieSky Royalty Ltd, a company it spun out to investors in May. The company has raised over $4.2 billion (US$3.8 billion) from that spin-out alone this year.
“Our portfolio now aligns with our vision of being a leading North American resource play company,” said Encana’s CEO Doug Suttles in a statement. “Our growth areas now include the top two resource plays in Canada, the Montney and Duvernay, and the top two resource plays in the United States, the Eagle Ford and the Permian.”
The deal, which is expected to close before the end of 2014, is subject to regulatory approvals. Encana is assuming Athlon’s US$1.15 billion of debt.
(Reporting by Euan Rocha in Toronto and Ashutosh Pandey in Bangalore; Editing by Simon Jennings, Ted Kerr and Chizu Nomiyama)
Photo of Encana Corp CEO Doug Suttles courtesy of Reuters/Todd Korol