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.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.