$7.7-billion pact makes Encana more American than Canadian

Acquisition of Houston-based Newfield another major shift to U.S., analysts say

Encana Corp., the storied Canadian company that had been slowly transitioning away from Canada and natural gas over the past few years under CEO Doug Suttles, has pivoted aggressively to U.S. shale basins.

The company announced Thursday it will acquire Houston-based Newfield Exploration Co. for US$5.5 billion in an all-share deal. Encana will also assume US$2.2 billion of Newfield’s debt. Analysts say the deal will flip Encana’s production profile from being 60 per cent weighted in Canada to roughly 60 per cent in the U.S. and represents yet another major shift Suttles has made at Encana. “A lot of the M&A that they did early on when he came in was from a position of weakness. They had to reposition that portfolio because it was primarily natural gas, and natural gas in all the wrong places,” Edward Jones analyst Jennifer Rowland said. “Now, roughly five years since he’s come in, I view this as an acquisition from strength.” Similarly, Wood Mackenzie research director Mark Oberstoetter called the deal “opportunistic” for Encana, noting that Newfield’s shares have fallen 40 per cent this year as the company struggled to grow production from its key asset in the Anadarko basin in Oklahoma. Newfield also has assets in North Dakota and Utah.

Still, investors were irked by the move, with Encana closing 12.2 per cent lower on the TSX at $11.80, following the deal announcement and its third-quarter results. Newfield jumped 15.5 per cent to $23.33. Significantly, the deal could signal a downgrade for Encana’s Calgary headquarters, which may no longer function as the central hub. “We call it a headquarterless model,” Suttles said Thursday. “We’ll have three locations: Calgary, Denver and Houston and actually the work happens where the people are, as opposed to the opposite.”

Suttles, formerly a BP Plc. executive, moved from Calgary to Denver earlier this year, though the company said that was for personal reasons and not a precursor to a relocation of Encana’s headquarters. Rowland said she did not expect the company to fully relocate its headquarters. “I’m not sure what they gain versus what they were to lose by burning that bridge, if they were to do that,” she said, noting the company is listed on the New York and Toronto stock exchanges. Encana reported US$39 million in net earnings in the third quarter, an 87-per-cent drop from the $294 million it earned in the same period last year, and announced a 25-per-cent hike in its dividend and a larger share buyback program. The share buyback should alleviate the market’s concerns and surprise following the blockbuster deal, Citi Research analyst Robert Morris said in a note.

“We knew management was on the hunt for another core North America oil play, but we weren’t expecting a STACK deal,” Morris said, referring to the Anadarko assets by its industry nickname of STACK/SCOOP. Newfield had struggled to drive significant oil production growth from “the STACK,” Morris said, but he expects Encana’s experience in Alberta and Texas would “drive better performance and more efficient development of this play.”

In years past, Encana was Canada’s largest natural gas producer. When Suttles joined the company in 2013, it began selling assets and narrowed its focus to what it called its“core four” areas: the Permian and Eagle Ford formations in Texas and the Montney and Duvernay formations in Alberta and B.C. Suttles said Encana will further narrow its focus to three core areas — the Montney, Permian and Anadarko plays — after it completes the Newfield deal.

The Eagle Ford, Duvernay and Newfield’s assets in North Dakota’s Williston formation would be used to “support value by generating significant free operating cash flow ” but would not be a core focus area, the company said.