Last year EnCana Corporation (TSX:ECA)(NYSE:ECA) transformed its portfolio through a series of transactions. Through that process, it paid US$9 billion to acquire oil-rich assets in the Permian Basin and Eagle Ford Shale. With the price of oil now half of what it was at this time last year, the company is starving to do another acquisition or two, as it sees now as a great time to buy more oil assets before the market turns around.
Another helping, please
In an interview with Bloomberg, EnCana CEO Doug Suttles said, “downturns are where the big exciting stuff happens.” What that means for EnCana, according to Suttles, is that his company is “very prepared to act if the right opportunity opens up in this environment, and that might be for buying something or selling something.”
That would follow the strategy the company employed last year, as it jettisoned its Bighorn acreage in Alberta for US$1.8 billion, while also setting PrairieSky Royalty Ltd. free. With the cash it picked up in those deals, it bought a position in the Eagle Ford Shale for US$3.1 billion and followed that with the purchase of the Permian Basin from Texas-based Athlon Energy for US$5.9 billion. Both of those deals have the company well positioned for future oil-driven growth.
The clock is ticking
There likely will be a lot of mergers and acquisitions over the next year, especially if the price of oil stays low. That’s because there are a number of oil companies that could run into financial problems as we head into 2016. That’s when many investors will see their oil hedges roll off, making them even more exposed to low oil prices. That’s a problem because several oil companies have a lot of debt, which will be harder to repay once cash flow dries up due to weaker oil hedges. This will force them to look at selling assets in order to reduce their debt burdens.
That could open up the opportunity for EnCana to swoop in and pick up assets that need to sell due to looming debt issues. However, what will be harder for the company to do is to sell assets for the capital it would need to pay for these assets. That’s because the non-core plays that EnCana might sell, which include the Tuscaloosa Marine Shale, San Juan, or Niobrara regions, aren’t exactly going to be popular with potential buyers, as these plays have yet to emerge like the Eagle Ford and Permian. That’s why the company might have to use its balance sheet to pay for a deal and then sell assets to pare down its own debt.
Investor takeaway
EnCana expects 2015 to be a very busy year, as it continues to hunt for acquisitions. It should have no shortage of opportunities, given the fact that there could be a lot of companies needing to sell due to looming debt problems. If the company can make a move, it could pay off big time down the road if the price of oil does improve in the years ahead.
