NEW YORK: A $3 billion deal by the shale industry's crude laggard is just a baby step. Encana is paying Freeport-McMoRan Copper & Gold just half the price per barrel Devon Energy paid in a similar deal last year for Texas oil wells.
After snubbing the shift from cheap gas for longer than rivals, the Canadian firm needed to do something. But catching up with oil shale leaders like EOG takes more than one canny deal.
Freeport could perhaps have held out for more, considering that Devon paid $6 billion in the same Texas shale region for wells producing 53,000 barrels a day exactly the same output as those just bought by Encana.
But Freeport's eagerness to reduce its $21 billion of debt probably played a role. This bargain price helps explain the 5 percent jump in Encana's market capitalization in the hours after the deal was announced.
Striking such a deal is a feather in the cap for Douglas Suttles, who took over as chief executive less than a year ago. He's only just starting to make up for years of strategic missteps, though. Encana continued to sink resources into boosting natural gas output, even as the price of gas plunged.
That's in stark contrast to EOG Resources, the most prescient of Encana's peers. It powered up its oil investments as far back as 2007.
Since then the price of US natural gas has fallen about two-fifths while crude is up by 50 percent. Even Chesapeake Energy, considered by many as a slowcoach, began to focus on oil drilling around 2010.
Encana took the opposite approach, spinning off its oil assets into Cenovus in late 2009. Since then Cenovus' stock has climbed 18 percent, against a 15 percent fall in Encana's share price.
The Texas fields purchased from Freeport will double Encana's oil output. But even then black oil will only account for 13 percent of its production. Compare that to once-gassy EOG, which now gets about two-thirds of output from oil.
Even after today's share price jump, Encana is still only up 20 percent over the past two years against a doubling in value at EOG. That leaves plenty of ground for Suttles to make up.
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