By Mark Christian on 11/03/2018, 4:10 CDT - Major shareholders controlling Newfield Exploration decided to sell the company to Canada's Encana Corporation for $5.5 billion in equity and $2.2 billion of assumed debt, a deal worth $7.7 billion dollars.
Since 2013, Encana has been divesting its Canadian and U.S. shale gas assets in favor of more profitable shale oil production. The company is one of the top 10 oil producers in Texas where it produces about 100,000 bpd and continues to focus on production assets in the Permian Basin and Eagle Ford.
Houston based Newfield Exploration (NYSE:NFX) discovered the "STACK" play in Oklahoma's prolific Anadarko Basin in 2013. STACK is an acronym for the "Sooner Trend, Anadarko, Canadian, and Kingfisher Counties", and refers to a geographical area and not a geological formation. The STACK has multiple hydrocarbon-rich formations stacked on top of each other including the Meramec, Osage, Oswego and Woodford formations. Newfield spent hundreds of millions of dollars tweaking drilling and completion designs to establish best practices for producing STACK wells while maintaining the most cost-efficient CAPEX program in the play.
Their hard work began to pay off in 2016 and 2017 when they started bringing in wells that produced more than 2000 barrels per day. Thanks to Newfield's delineation efforts, the STACK is considered to be the best place in the U.S. to invest, in terms of productivity and margin, outside of the Permian Basin.
That is why it is a shame to see Newfield swallowed up by a foreign oil company. Over the last five years, Newfield's management shifted focus to the STACK play and successfully managed CAPEX by selling off non-core assets to reduce debt and fund their drilling and completion program. During a time when its competitors were filing for Chapter 11 bankruptcy protection, Newfield invested a tremendous amount of hard work into lowering drilling and completion costs and improving production results. This effort resulted in the most profitable and productive wells in the State of Oklahoma.
Newfield's success optimizing production and maximizing profits in the STACK positioned it to begin harvesting the thousands of acres it had leased in the play. Armed with the best ground outside of the Permian Basin, the most efficient drilling and completion programs, and one of the leanest balance sheets among STACK operators, Newfield was set to start making a lot of money.
That is what made them such an attractive acquisition target to Encana. Newfield's profitability will allow Encana to siphon off cash to fund corporate share buybacks and dividend payments. A plan they are already advertising on their corporate website.
Too bad those payments will not end up in American pockets.