Freeport-McMoRan (NYSE:FCX) announced today that it was selling its Eagle Ford Shale assets to Encana (NYSE:ECA) for $3.1 billion. This looks like a solid deal for both companies. Let's take a closer look.
Why it's a good deal for Freeport-McMoRan
This sale makes a lot of sense for Freeport-McMoRan given how it was using the asset. While most of its peers are using the Eagle Ford Shale for growth, Freeport-McMoRan was using it for cash flow. The company had purposefully cut its capital spending since acquiring the asset to maximize cash flow (as the slide below notes) to pay down the massive amount of debt it took on when it made its big energy deals last year.
Still, despite cutting capital spending the Eagle Ford Shale has really shined since Freeport-McMoRan acquired it. Last quarter the company credited strong production from its Eagle Ford Shale assets as being one of the secrets to its first-quarter success. That said, shale assets like the Eagle Ford decline quickly and it wasn't likely that the company could continue to outperform unless it started adding more capital to the business. With so much more promise in the Gulf of Mexico, Freeport-McMoRan can cash in on its Eagle Ford Shale success and use that cash to pay down debt, while it focuses its oil and gas cash flow to grow its operations in the Gulf. Because of that the asset really is better off in other hands.
Why it's a good deal for Encana
This is an acquisition that also makes a lot of sense for Encana. The company is picking up an oil-rich asset, which will fit in well with the company's new focus on growing its liquids production. The deal will actually double the company's current oil production while providing it with at least 400 additional drilling locations that can be drilled to fuel additional oil production growth. With 355 wells drilled so far, Encana has plenty of running room to grow oil production in the Eagle Ford Shale.
The deal also adds a sixth core play to Encana's portfolio. It's an important addition because all five of the company's other core plays are riskier emerging plays. Meanwhile, the Eagle Ford Shale is an established oil play, which helps reduce some of the company's risk profile. The company also expects the asset to continue to be cash flow positive, which will enable it to continue executing its 2014 capital plan without redirecting capital from its other core plays. However, the company does plan to reverse Freeport-McMoRan's cash harvest plan by ramping up drilling activities later on in the year.
This is a deal that simply makes a lot of sense for both companies. Freeport-McMoRan got out about as much as it could from its Eagle Ford Shale assets, which just weren't going to move the needle as much as its Gulf of Mexico assets over the long-term. Meanwhile, for a shale focused driller like Encana, this is a deal that does move the needle as it doubles current oil production and adds a big inventory of future well sites. Meanwhile, it actually reduces the company's overall risk profile by adding an established oil play to the company's portfolio of emerging oil and liquids-rich plays.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.