Encana Corporation Update

ECA : NYSE : US$21.59
Target: US$25.00 

Energy — Oil and Gas, Exploration and Production
We maintain our HOLD rating but raise our target to $25 (from $24) post
ECA’s announced planned acquisition of Athlon Energy (ATHL : NASDAQ :
$58.32 | HOLD, covered by Eli Kantor). We applaud ECA for a high-quality
entry into a premier U.S. oil play; one that has multi-zone upside potential.
However, we do believe there are some key questions that need to be
addressed over time:
1. Are the 50 MBOE/d 2015 average and 200-250 MBOE/d by 2019 targets
achievable? Yes, in our view; but it will require improvements in drill
times. Prior to ECA’s announcement, Canaccord Genuity estimated 2015
production for ATHL to be 41 MBOE/d. Now this assumes about $965
million of capex and 6 rigs by year-end. Nevertheless, even when
assuming the 7 rigs by year-end 2015 that ECA plans to go to, we are
still short ~5 MBOE/d of ECA’s 50 MBOE/d target for the year. With
respect to the longer-term target, assuming 7 rigs per year still gets us
to only about 140 MBOE/d average for 2019. The aforementioned
assume a spud to rig release timing of 27 days. Therefore, reducing it to
15 days, which is in line with what Pioneer Natural Resources (PXD :
NYSE : $201.96 | HOLD, covered by Eli Kantor) is targeting, yields ECA’s
targets. However, there is one other potential bottleneck for the outer
years, and that is infrastructure (i.e. plants) to handle the increased
production capacity that ECA is targeting as well as potential cost
inflation/capacity constraints due to increased services competition.
2. Did the company pay up for the asset? Yes, to an extent. As shown in
Figure 1, the transaction is about 20% dilutive on an EV/DACF basis.
Even when assuming 50 MBOE/d of production in 2015 for ATHL, it is
still 15% dilutive. However, there is some accretion on an NPV basis
when assuming over 5,000 hz locations (vs. the 1,850 locations ATHL
assumes which looks conservative as we discuss later in this note),
hence our target increase. Also it used high priced PrairieSky paper to
help fund the acquisition.
3. Will ECA be successful in retaining ATHL employees? Only time will tell
on this one. If the ATHL management team sets up a new company,
there is risk of departures, albeit limited in the near-term by any
potential non-competes imposed on top management of ATHL


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