Topic: Energy Stocks

Acquisition sets stage for 25% dividend hike

A $7.7 billion merger between two oil and natural gas producers should make for a more geographically diversified company. At the same time, the deal should cuts $250 million in costs annually while expanding production by 53%.

The new company also plans to buy back a significant number of its shares and to increase its dividend 25% if regulators approve the merger.

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ENCANA CORP. (Toronto symbol ECA; operates four key properties: Montney (B.C.), Duvernay (Alberta), and Eagle Ford and Permian (both in Texas). In addition to natural gas, these fields produce large amounts of oil and natural gas liquids.

The company recently agreed to acquire Newfield Exploration.

Newfield operates shale oil and natural gas wells in the Stack and Scoop fields of Oklahoma, the Bakken region of North Dakota and Utah’s Uinta basin. Encana has issued $5.5 billion U.S. in shares to pay Newfield investors. That means Encana shareholders will own about 63.5% of the combined company with Newfield shareholders holding the remaining 36.5%. If you include that firm’s debt, the takeover ultimately comes to $7.7 billion U.S.

Encana’s big, newly announced acquisition increases its risk, which is why the stock dropped sharply on the news.

Energy Stocks: Post merger plans should boost production and cashflow while cutting costs

However, the purchase should increase Encana’s production 53% to roughly 577,000 barrels a day (52% oil and liquids, 48% gas). Encana aims to complete the merger in February 2019. The company will then launch a new plan to buy back $1.25 billion U.S. of its shares, or about 12% of the total outstanding. It will also increase its quarterly dividend by 25.0%. The new annual rate of $0.075 U.S. would yield 1.2%.

The merger will let Encana cut $250 million U.S. from its annual costs (half from merging corporate functions and half from applying its more-efficient drilling techniques to Newfield’s wells). To put that target in perspective, the company will probably report cash flow of $2.1 billion U.S., or $2.23 U.S. a share, for 2018.

Recommendation in The Successful Investor: Encana is still a hold


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