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Is This Cornerstone Producer Giving Up on Natgas?

A very unusual transaction in the petroleum space this week. Showing that some of the biggest natural gas backers in North America may finally be throwing in the towel on this beaten-up commodity.

The move comes from Canadian producer Encana. A cornerstone player in the North American natural gas sector--who is apparently looking to oil for its corporate growth going forward.

The company took a big step toward crude this week. Making a takeover bid for U.S.-based Athlon Energy--a big player in one of the largest oil plays going in America.

Related: America’s Big Bet On Natural Gas And Big Short On Coal

Encana said it will pay $5.93 billion for Athlon. And assume about $1.15 billion in debt--bringing the total price tag for the deal to over $7 billion.

That's a big outlay. Especially given that Athlon's assets are a major departure for Encana. Being mainly located in the Permian Basin of Texas, where the target is oil as opposed to natgas.

Athlon currently produces 30,000 barrels of oil per day from the Permian. And the prospects for growth from this acreage are strong--with the Permian yielding some of the best drilling results across North America, from a series of stacked pay zones in the play.

Encana said it will aggressively pursue more drilling on the Athlon acreage. Dedicating a budget of over $1 billion to the 140,000 acres of lands it will now own here.

Overall, the firm believes this work could increase production to 50,000 barrels per day. A big rise, if the predictions are accurate.

Related: Why U.S. Should Be Cautious About LNG Exports

That kind of production potential may be one of the biggest reasons for Encana making the gas-to-oil switch. You simply don't get the kind of growth that's coming out of the Permian in many plays today.

But the deal may also represent a tacit admission that gas is losing its appeal for producers. With languishing prices below $4 per mcf squeezing profit margins, and making most projects in this space near-uneconomic.

We'll see if Encana and other gas producers pursue more oil-heavy acquisitions. Or if this really is a rush for the Permian particularly--confirming that this is the hottest petroleum play going in the world right now.

Here's to switching it up,

Dave Forest

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