November 1, 2018 / 10:42 AM / a month ago

UPDATE 4-Canada's Encana widens N. America reach with $5.5 bln Newfield deal

(Adds analyst comment on investor reaction, further M&A, deal risks)

By Nishara Karuvalli Pathikkal and Laharee Chatterjee

Nov 1 (Reuters) - Canada’s Encana Corp will buy Newfield Exploration Co for $5.5 billion, giving the natural gas producer greater access to North America’s biggest oilfields, and potentially spurring further deals.

Thursday’s all-stock deal will give Encana more acreage in the fast-growing Anadarko basin in Oklahoma, along with its holdings in the U.S. Permian and Eagle Ford basins and Canadian Montney and Duvernay regions.

Initial investor reaction was unkind, as U.S. listed shares of Encana fell 16 percent, while Newfield rose 10 percent. Shares of Newfield have struggled all year, in part because investors have been less enthused about its shale properties in the Mid-Continent region in Oklahoma, given the market’s preference for the more lucrative Permian region in west Texas.

“Investors have really soured on the Mid-Continent and Oklahoma; it’s very complex and very hard to understand,” said Roy Martin, research analyst at Wood Mackensie in London.

However, the deal fits into Encana’s five-year plan to boost output by focusing on high-margin, liquids-rich production, with Canadian natural gas generating some of the world’s lowest prices.

The deal looked likely to kick off a flurry of mergers and acquisitions next year, as the U.S. shale industry has matured, forcing companies to consolidate to grow and become more efficient, energy investment bank Tudor Pickering Holt & Co (TPH) said in a note.

“Buckle up as the upstream merger train has left the station and next year will likely be a wild ride,” TPH said.

“This (deal) gives Encana a third growth area in the STACK/SCOOP. It also makes it more weighted obviously to the U.S. and U.S. oil,” Eight Capital analyst Phil Skolnick wrote in a note.

The SCOOP/STACK region is a fast-growing shale oil play in the Anadarko basin in Oklahoma and Texas that is attracting investment from oil producers expanding beyond Texas’s giant Permian basin, which is getting costly.

“We have large contiguous positions in three of the best plays in North America ... Southwest Kingfisher County feels like the place that is ripe for development today,” Chief Executive Officer Doug Suttles said in a conference call, referring to the STACK region.

Encana’s Newfield acquisition comes against the backdrop of increased deal-making in the U.S. shale industry.

Chesapeake Energy inked a $4 billion deal to buy Texas oil producer WildHorse Resource Development Corp on Tuesday. Earlier this year, Concho Resources offered to buy rival RSP Permian Inc in an $8 billion deal.

TPH said it can see more than 10 potential shale deals that would make sense, based on the strategic combinations of assets and cost synergies that would be unlocked.

QEP Resources Inc, which produces oil and gas in Texas, Louisiana and North Dakota, is a potential target, TPH said. A QEP spokesman did not immediately respond to a request for comment.

Encana said liquids production will make up more than half of the combined company’s total output and help expand margins.

Even so, Newfield’s shares have suffered this year because investors have soured on its Oklahoma assets in the Mid-Continent region, suggesting risks to Encana, said Roy Martin, analyst at consultancy Wood Mackenzie.

“They’ve got their work cut out for them as far as applying Permian best practices on the Mid-Continent.”

Encana will buy Newfield for about $27.36 per share, a 35 percent premium based on Newfield’s Wednesday close.

Newfield shareholders will receive 2.6719 Encana common shares for each share of Newfield common stock.

Separately, Calgary, Alberta-based Encana, which reported third-quarter results on Thursday, said total production rose 33 percent to 378,200 barrels of oil equivalent per day (BOE/d).

Oil and oil equivalent production rose 40 percent to 178,700 barrels per day. (Reporting by Nishara Karuvalli Pathikkal and Nivedita Bhattacharjee; additional reporting by Rod Nickel in Calgary, Alberta and David Gaffen in New York; Editing by Arun Koyyur and Tom Brown)

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