Energy Prospectus

Your thoughts on Encana’s acquisition of Newfield? The the deal price is considerably less than your break up value. At 2.67 shares for each NFX share maybe Encana can do a better job of getting the market to recognize the value of its assets but it appears the market doesn’t think its a good deal for Encana.

This morning (Nov 1) Gabriele Sorbara at Williams Capital sent a new report on NFX to Reuter. He rates it a BUY with a valuation of $44.00.

I have a lot of respect for Gabriele. He's one of the best energy sector analysts.

My valuation of NFX is $49/share.

I had some serious computer problems yesterday. Our power was out for several hours and one of my monitors "died". So... I am just getting back up to speed.

EnCana is a former Sweet 16 company. It is based in Canada, but has a lot of operations in the U.S. EnCana is rock solid. Frankly, I am surprise that it has taken this long for Newfield to be taken over by a larger company. This is an all stock deal, so NFX shareholder should be happy and just hang tough with the EnCana shares, which are probably trading at a deep discount to fair value.
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Canadian oil and gas producer Encana said on Thursday it will buy Newfield Exploration Co. for $5.5 billion, for greater access to North America's biggest oil patches and making it one of the largest shale oil producers in the region.

As part of the all-stock deal, Encana will get greater access to the Anadarko basin as well as the Permian and Montney areas.

Encana is focusing on high-margin, liquids-rich production from the Montney and Duvernay oilfields in Canada and the Eagle Ford and Permian in the United States as part of a five-year plan to boost output.


"This strategic combination advances our strategy and is immediately accretive to our five-year plan," Chief Executive Officer Doug Suttles said in a statement.

EnCana said liquids production will contribute over half of the combined company's production and help expand margins. Under the terms of the deal, Newfield shareholders will receive 2.6719 Encana common shares for each share of Newfield common stock.

Separately, the Calgary, Alberta-based company said total production rose 33 percent to 378,200 barrels of oil equivalent per day (BOE/d) in the third-quarter ended Sept. 30.

Oil and oil equivalent production rose 40 percent to 178,700 barrels per day.

Shares of Newfield rose about 19 percent to $24.06 in pre-market trading. U.S. listed shares of Encana were trading slightly up at $10.30, having closed at $10.24 on Wednesday

For the third quarter, Newfield reported net income of $224 million, or $1.11 per diluted share (all per share amounts are on a diluted basis). Earnings were impacted by an unrealized derivative gain of $20 million, or $0.10 per share. After adjusting for the effects of the unrealized derivative gain, net income would have been $204 million, or $1.01 per share. < This compares to my forecast of $176 million net income, or $0.87 per share.

Third Quarter 2018 Highlights

•Newfield's consolidated net production in the third quarter was more than 202,000 BOEPD (38% oil and 62% liquids). This compares favorably to the Company's quarterly guidance range of 187,000 - 198,000 BOEPD. < Production for Q3 compares to my forecast of 200,500 BOEPD.

•Domestic net production was approximately 199,000 BOEPD and bested the mid-point of quarterly guidance by approximately 9,000 BOEPD (~5% higher). Domestic net oil production was approximately 74,300 BOPD. Oil and natural gas liquids comprised 37% and 24% of total domestic production, respectively.

•Stronger than expected production in the third quarter was largely attributable to the Anadarko Basin, which grew 11% over the second quarter of 2018 and averaged over 143,700 BOEPD. Production from the Anadarko Basin exceeded the mid-point of third quarter guidance by more than 8,700 BOEPD. Compared to the same period in 2017, production increased 37%. Anadarko Basin liquids production in the quarter was nearly 87,000 Bbls/d, up approximately 8% over the previous quarter. Net crude oil production from the Anadarko Basin was in-line with expectations and averaged approximately 43,200 BOEPD, with year-to-date volumes growing more than 30% over the comparable period in 2017.

•Newfield lifted approximately 261,000 net barrels of oil during the quarter from its offshore field in China.

•During the third quarter, the Company continued STACK cube development, commencing row drilling operations across multiple drilling units. This effort will allow the Company to optimize operations, test simultaneous cube development of the Meramec, Osage and Woodford, utilize permanent water infrastructure and reduce downtime associated with offset activities.

•In the Williston Basin, net production during the third quarter averaged 21,400 BOEPD, of which 68% was oil. The Company continues to see positive results from increased density spacing in the Bakken.

•In the Uinta Basin, the Company has grown net production 16% year-over-year with a single-rig program. Net production from the Uinta Basin averaged nearly 20,000 BOEPD during the quarter, of which 83% was oil.

I have updated my forecast/valuation for NFX. I have lowered my valuation by $9 to $40.00/share just because I am now using a lower multiple of operating cash flow to value it. From 7X to 6X CFPS, which is very low for a company that is now generating free cash flow and appears to have double digit production growth locked in for several years.

Unless you believe that EnCana stock is grossly under-valued, which it may be, the offer in market value is barely over 3X operating cash flow per share. Even adding in the assumption of Newfield's debt it is just 5X operating cash flow per share. First Call's estimate of Newfield's operating cash flow per share in 2019 is close to $9.00/share. IMO an open bidding war for NFX should bring in over 6X CFPS.

IMO this is going to be a hard sell to the shareholders unless they can convince them that the scale of the combined company will draw a lot more attention, which it definitely should.

Bloomberg seems to agree: https://www.bloomberg.com/opinion/artic ... r-response

My updated forecast model for NFX will be posted to the EPG website this afternoon.

As a NFX investor I'm furious that management grabbed this offer.
NFX stock price was about $32 Jan 1 and traded between $27 to $30 for the last 7 months.
So cash flow and production substantially improves the last 2 quarters and the company pulls the trigger to sell itself just after the biggest market selloff of the year ?
You gotta be kidding me.
Only good thing is my position was relatively small.

NFX management must have received some glorious golden parachutes. Bah- Humbug.

Just keep in mind that stock for stock mergers are much different than a sale of the company for cash. The transaction will be tax free for NFX and you still have all of the upside since ECA is also selling at a deep discount.

EnCana is a very good company, so maybe this deal will cause the Wall Street Gang to take a much harder look. Post-merger this is going to be a large-cap E&P with close to 600,000 BOE per day of production.

With an all stock merger you really haven't sold anything. Maybe 1+1 = 2.5. < I'm sure this is what NFX management is going to tell the market.

Does anyone think that a hostile takeover could be in the works for like 25+ per share although since both boards have already approved the deal I would assume that is unlikely??

It is always possible for another company to jump in with a higher offer. When I was at Hess, we were very close to closing on the acquisition of another company and another company topped our bid. It ended up being a blessing for Hess because that target company had a lot of assets in Venezuela, which soon after the deal closed were taken by the government of that corrupt country.

I will take a hard look at EnCana in December.