RE:RBC's TakeCleaned it up.
Permian Joins the Roster
In our minds,Encana Corporation’s $5.93 billion acquisition of Athlon Energy
(covered by RBC Analyst Scott Hanold) affords it with afairway of growth over the next decade in the oil- rich Permian Basin. The deal shores up Encana’s
drilling inventory in the 5+ year time horizon, complements a fulsome pipeline over the next 3 -5 years, and serves to reduce its reinvestment risk profile.
The company now expects to achieve its initial 2017 target to reach
75% of operating cash flow from liquids production by 2015, accelerating its
portfolio rebalancing by 2 years. Encana has executed this transformation while preserving its balance sheet strength, with a net debt - to - trailing
cash flow ratio of 1.8 x in 2015E and 1.5x in 2016E. The $7.1 billion
transaction (inclusive of debt) is approximately 17% ($0.76 per share
) accretive to our 2015 CFPS outlook, and fairly neutral to our Base NAV, which now stands at $ 24.04 per share. Encana’s operating netbacks (revenues less operating costs) are poised to rise by 21% ($6.90
/boe) on a sequential basis in 2015 (under stable commodity prices) in connection with its production mix shift. Combined with its $3.1 billion Eagle Ford acquisition – and steps to reduce its exposure to non - core properties
like Big horn, Encana has radically repositioned its portfolio, which now
consists of seven core plays, including the Montney, Duvernay, DJ Basin, and San Juan. The company continues to look upon 4 - 8 core plays as optimal, while retaining substantial dry gas leverage in the Haynesville, Piceance, and
Montney. In our view, Encana’s relative cash flow multiple and market performance will revolve around its execution in 2015. While 2014 has been a
busy year of portfolio transition via acquisitions & divestitures, these steps are a means to an end for Encana – as operational integration and performance
now move into sharper focus. More simply, while Encana clearly has more balls in the air than it did just one year ago, meeting its production targets
and living within its means will be top of mind market wise. This is good news in our books, in large part because Encana’s operating improvements over the past year have largely been overshadowed by frequent transactions. Factoring in the PrairieSky disposition and Athlon deal, our oil & liquids production outlook for Encana now sits at 85,700 b/dvs. 87,800b/d)
in 2014 and 150,500 b/d(vs.125,000b/d) in 2015. With our research restriction
lifted on Encana , wehave updated our production, earnings and cash flow estimates to reflect the Athlon acquisition, sale of its remaining interest
in PrairieSky , revised commodity price outlook, and introduction of 2016
estimates. We are reaffirming an Outperform rating on Encana and have boosted our one - year target price by 10 % to $33 per share (vs. $30). Our one - year target price reflects a 60% weighting toward a multiple of 1.0x our revised Base NAV of $24.04 per share (vs. $24.15) and a 40% weighting tow
ard a 2016 implied mid - cycle debt - adjusted cash flow multiple of 7.0x. Our
revised target reflects both the PrairieSky disposition and the Athlon acquisition. The Deal – Athlon Energy. Encana ’s total consideration of $7.08 billion for Athlon consists of $5.93 billion of cash plus a $1.15 billion assumption of senior notes. Athlon holds 140,000 net acres (90% wi) of land
across the Midland, Martin, Howard, Glasscock and other counties in
the heart of the Midland Basin (Permian) , which hosts 11+ producing horizons, foremost amongst which are the Wolfcamp and Spraberry shale.
Proved (1P) reserves currently stand at 173 mmboe. These assets are currently supporting production of 30,000 boe/d (60% oil, 20% NGLs, 20% natural gas), which is expected to grow to 50,000 boe/d on average in 2015. Anchored by a $1 billion capital program in the Permian next year, Encana expects its horizontal rig count to rise from 3 to 7 rigs by year - end 2015, flanked by 6- 8 vertical rigs.