What happened

In a stunning move, Encana Corp. (NYSE:ECA) agreed to acquire rival shale driller Newfield Exploration Co. (NYSE: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.