DBRS Comments on Encana’s Acquisition of Athlon Energy Inc.

DBRS today notes that Encana Corporation (Encana or the Company; rated BBB with a Stable trend by DBRS) has announced its entry into the Permian basin with the $7.1 billion acquisition of Athlon Energy Inc. (the Transaction). Athlon Energy Inc. (Athlon) is an independent exploration and production company focused on the development and exploitation of unconventional oil and liquids-rich natural gas reserves in the Permian Basin with approximately 80% of its current production (30,000 barrels of oil equivalent per day) comprised of liquids. The Transaction will be funded by $5.93 billion in cash and $1.15 billion of assumed Athlon notes.

From a business risk profile perspective, DBRS considers the Transaction to be credit positive for Encana as it helps the Company further accelerate rebalancing of its portfolio away from natural gas and toward higher netback crude oil. Pro forma the Transaction, Encana’s production mix is expected to improve significantly with the proportion of liquids improving to near 35% in 2015 from approximately 13% in June 2014. This move is expected to provide Encana an entry into another high netback liquids-rich shale play (the Permian basin) along with its recent entry into the rich Eagle Ford shale. The acquired assets are expected to be self-funding by 2016.

Upon closing, Encana’s financial risk profile is expected to remain largely neutral as the Transaction is predominantly funded with cash. DBRS expects Encana’s key credit metrics to improve as incremental higher margin liquids production from the Permian basin and the Eagle Ford shale strengthens Encana’s cash flow generation in the near term.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Oil and Gas Industry and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, which can be found on our website under Methodologies.

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