Please ensure Javascript is enabled for purposes of website accessibility

These 2 Oil Stocks Just Stunned Investors, Causing Their Shares to Go Haywire Today

By Matthew DiLallo - Nov 1, 2018 at 11:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Encana Corp. and Newfield Exploration Co. are going in opposite directions.

What happened

In a stunning move, Encana Corp. (OVV 5.90%) agreed to acquire rival shale driller Newfield Exploration Co. (NFX) in an all-stock deal valuing the target at $5.5 billion. The news acted like rocket fuel for Newfield's stock, as it surged more 12% by 10 a.m. EDT on Thursday, while weighing on Encana's shares, which tumbled more than 15% in early morning trading. 

So what

Encana is paying $5.5 billion in stock, as well as assuming $2.2 billion in debt, to acquire Newfield Exploration. The strategic combination will create a leading multi-basin driller by fusing Encana's positions in the Permian Basin of Texas and Montney shale in western Canada with Newfield's acreage in the STACK/SCOOP plays of Oklahoma. The deal will make Encana the second-largest shale producer at roughly 577,000 barrels of oil equivalent per day.

A silhouette of two people near some oil pumps at sunset.

Image source: Getty Images.

The transaction will enhance the combined company's balance sheet and should generate $250 million in annual cost savings. Furthermore, the company should produce significant free cash flow, which Encana intends on using to raise its dividend 25% while expanding its share-buyback program from $400 million to $1.5 billion.

Now what

Encana is getting a steal given how cheaply shares of Newfield Exploration traded before the acquisition announcement. The transaction also provides the company with a third growth engine to complement its core positions in the Permian and Montney. Because of that, today's sell-off makes the stock look very appealing, especially when considering its long-term growth prospects and enhanced cash returns to shareholders.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ovintiv Inc. Stock Quote
Ovintiv Inc.
$45.43 (5.90%) $2.53
Newfield Exploration Company Stock Quote
Newfield Exploration Company

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.