In the third billion-dollar-plus merger between publicly traded oil and gas producers announced this week, Canada’s Encana Corp. said Thursday it agreed to buy The Woodlands-based Newfield Exploration Co. for $7.7 billion.
The deal includes $5.5 billion in stock and $2.2 billion in debt assumption.
Newfield stockholders will get 2.6719 shares of Encana for each of their shares. Encana shareholders will end up with about 63.5 percent of the combination while Newfield stockholders will hold around 36.5 percent and two Newfield directors will join the Encana board.
Williams Capital analyst Gabriele Sorbara calculates the equity premium at 35.4 percent, implying $27.36 per share, below his stock price target of $44 per share.
Calgary-based Encana said the deal will create a leading multi-basin company with large positions in West Texas’ and New Mexico’s Permian Basin, Oklahoma’s Stack/Scoop play in the Anadarko Basin and the Montney Shale in Canada. It also claims the transaction makes it North America’s second largest producer of unconventional resources.
The parties expect to close the transaction in the first quarter if it clears both companies’ stockholders and Hart-Scott-Rodino.
“This strategic combination advances our strategy and is immediately accretive to our five-year plan,” Encana CEO and president Doug Suttles – a onetime Texan – said in a statement.
Newfield chairman, CEO and president Lee K. Boothby said the new organization will be capable of efficiently developing high-value growth assets while delivering significant cash to shareholders. “This transaction is the best path forward for our company,” he said.
Kirkland & Ellis advised Newfield along with Wachtell, Lipton, Rosen & Katz.
The Kirkland team was led by Houston corporate partner Sean T. Wheeler, who joined the firm in July from Latham & Watkins.
Others leading the transaction were partners Doug Bacon, Anthony Speier and Rahul Vashi, also of Houston; partners Ryan Gorsche and Benjamin Adelson in Dallas, where Kirkland opened an office in July (both came from Weil Gotshal & Manges); and associates Camille Walker, Jennifer Singh and Lindsey Jaquillard, all of Houston.
Specialists included tax partners David Wheat, who offices out of Houston and Dallas, and environmental transactions partner Paul Tanaka in Houston. The team had assistance from lawyers in the firm’s Chicago and New York offices on tax, executive compensation and employee benefits matters.
Newfield’s in-house counsel on the deal were assistant general counsel Ben Paul, who previously worked with Kirkland’s Wheeler on deals at Latham and Baker Botts; and assistant general counsel Meghan Eilers, who previously was in the legal department of Noble Energy for 10-plus years and was an attorney at Croft & Associates.
Newfield doesn’t have a general counsel currently. Its previous general counsel, Tim Yang, left the company in September to join Magnolia Oil & Gas as its top legal officer.
Paul, Weiss, Rifkind, Wharton & Garrison and Blake, Cassels & Graydon counseled Encana, which used Credit Suisse and TD Securities as financial advisors.
J.P. Morgan Securities provided a fairness opinion to Newfield’s board and J.P. Morgan and Goldman Sachs & Co. were its financial advisors. Scotiabank was Newfield’s technical advisor.
The transaction is Kirkland’s second public energy company deal and second cross-border public M&A transaction in less than four weeks with a combined value of $17.5 billion. The firm also advised Rowan Cos. on its $12 billion combination with Ensco. Wheeler led both transactions.
In an interview, Wheeler said he hadn’t done work for Newfield in the past but Kirkland had advised it on capital markets and some transactions (Vinson & Elkins also had done work for Newfield, including its IPO). He said Newfield’s sale was driven by investors’ desire for oil and gas producers to gain scale so they can drive down costs and return cash to shareholders through dividends and stock buybacks.
“If you don’t have scale, it’s hard to compete on a go-forward basis. So a lot of people are looking at, ‘Do I buy, go it alone or look at being consolidation target?’” Wheeler said. “I feel highly confident that in the next month or two, several more will be announced. Consolidation is at the top of everyone’s mind. You don’t want to be the one without a chair when the music stops.”
Newfield has long been considered a takeover target given its valuable oil and gas properties in the Stack/Scoop play in Oklahoma, although it also has assets in the Rockies, Utah’s Uinta Basin and off the coast of China.
“While we have seen several deals in the sector recently, we believe this combination is very favorable to the buyer, as the deal provides a core position in the Stack/Scoop play at an attractive valuation,” Williams Capital’s Sorbara noted.
The analyst said the transaction is valued at $11.26 per barrel of oil equivalent of proved reserve, $37,869 per flowing barrel of oil equivalent per day of production and about $7,225 per Stack/Scoop undeveloped acre.
On an enterprise value-to-EBITDA basis, the trade was made at 3.7 times on next year’s numbers, a 24.5 percent discount to Encana, and 2.9 times for 2020, a 27.8 percent discount, Sorbara said.
In a note in June, Sorbara suggested that the company could sell its Williston assets in North Dakota for around $850 million, using the funds to accelerate its exploration and production program, further enhance liquidity or improve its portfolio via bolt-on acquisitions.
Encana expects the combination to provide $250 million in annual synergies through greater scale, cube development and overhead savings. Analysts at Tudor, Pickering, Holt said Newfield had the highest G&A-to-market cap of the mid-cap companies it follows at around 4.5 percent versus Encana’s 2.5 percent.
More importantly, Sorbara said the transaction is accretive to Encana on key metrics and that the company intends to raise its dividend by 25 percent and expand its share buyback program to $1.5 billion after the deal’s closing.
While the Encana-Newfield merger marks another significant transaction in the upstream space, analysts at TPH think it represents the tip of the M&A iceberg that will emerge in 2019. They say the cause is the maturing of the shale industry, which will lead companies will look to consolidation to gain scalable cost synergies and inventory.
“All of this is a healthy (and necessary) evolution in the upstream space,” they said. “We can easily think of more than 10 additional deals where there should be a strategic asset rationale or cost synergies that would make sense heading into 2019.”
The analysts said the 10 names – which include Carrizo Oil & Gas, Oasis Petroleum, Laredo Petroleum and QEP Resources – would represent more than $38 billion in market cap and around $1.2 billion in G&A alone. “Buckle up, as the upstream merger train has left the station and next year will likely be a wild ride,” they said.
Raymond James analyst John Freeman said that in the event the deal falls through another possible bidder for Newfield would be Continental Resources, which operates in roughly the same area. “That being said, we don’t anticipate anyone coming in over the top,” he acknowledged.