“We believe investors will warm up to the deal as they assess the scale and benefits EOG can extract over a 1.1 million net-acre position in Ohio,” said Tim Rezvan at KeyBanc Capital Markets.
The deal, expected to close in the second half of this year, is 10% accretive on an annualized basis to EOG’s 2025 earnings and 9% accretive on an annualized basis for both cash flow from operations and free cash flow, Chairman and CEO Ezra Yacob told investors during a conference call following the announcement.
“After closing, we will continue to have the strongest balance sheet in our peer group underscoring our relentless focus on capital discipline,” he said.
CPP and Encino established EAP in 2017 to acquire high quality oil and gas assets with an established base of production in mature basins across the Lower 48.
“We are pleased with EAP’s success and the strong returns this investment has delivered,” said Bill Rogers, head of sustainable energies at CPP.
The investment group is active globally and holds net assets worth some $26.4 billion (CA$36.3 billion).
EOG’s acquisition has industrial logic, Rezvan said, given the price and the contiguous acreage. Likely year-end leverage of 0.3x is manageable.
“There has been marketplace chatter about Encino’s owners seeking an exit strategy for several years, and EOG is one of a few operators to be able to digest a $5.6 billion acquisition,” he said.
Leo Mariani, managing director at Roth Capital Energy Group, estimated EOG paid about $5,000 per undeveloped acre for Encino, assuming a price close to $15,000 per flowing boe for production with more than half of Encino’s acreage undeveloped.
“This is a good value, in our opinion, compared to what others have recently paid for more competitive basins in North America,” he said.
“However, the basin is still in the early days of proving out the competitiveness of the volatile oil window with other premier shale plays.”
Details of EOG Resources $5.6 billion deal to buy Encino's Utica assets. (Source: Hart Energy)
Rezvan, an admitted bull on Utica Shale productivity, noted some market reticence about the play. He said more data points should improve the sentiment.
“The combination of attractive pricing, overlapping acreage and a thoughtful marketing portfolio from Encino all validate the acquisition to us. Lastly, EOG’s low cost of capital and ability to use scale to drive down well costs should not be overlooked as tangible synergies,” Rezvan said.
This time last year, KeyBanc produced a deep dive on the Utica, highlighting EOG’s increasing activity there. In June 2024, about 577 wells had been drilled in the play, and KeyBanc said it would be “premature to judge a play, especially with an O.G. shale operator like EOG Resources entering” and stepping up activity.
The analysts leaned in on well data and found promising results.
“Clients have been skeptical that high initial oil cuts in the volatile oil window of the Utica hold up, with some dismissive comments that oil cuts ‘fall off a cliff,’” Rezvan wrote.
“Our work refutes that bear-case thesis. We see decline rates that compare favorably with those from four other oily shale plays, which we believe debunks the bear case on EOG’s ongoing Utica development.”
Loaded for bear
EOG doesn’t crave the spotlight, its leadership doesn’t jump on bandwagons or trends and the company rarely releases flashy headlines. EOG was noticeably absent from the consolidation frenzy of late 2023 and throughout 2024. Rather, the company has steadily built its diverse footprint, making bolt-on deals for congruent acreage that, in recent years, have positioned them to make a strong case for organic growth.
“Our ability to execute on the Encino acquisition without diluting our shareholders is a textbook example of how EOG utilizes its industry-leading balance sheet to take advantage of countercyclical opportunities to enhance the returns of our business and create long-term value for our shareholders,” Yacob said.
(Source: EOG Resources)
EOG’s last big foray into M&A was in 2016 when the firm bought Yates Petroleum, which more than doubled its presence in the Permian Basin and expanded its Powder River Basin acreage. The $2.5 billion cash-and-stock transaction increased EOG’s Delaware position by 78% to 424,000 net acres, including 86,000 net acres of stacked pay in New Mexico with prospects in the Wolfcamp, Bone Spring and Leonard shale formations.
EOG stood out for its silence in 2024 when many public independents—including Diamondback Energy, Coterra Energy and Devon Energy—acquired private producers. By year-end, upstream M&A reached $105 billion, the third highest total tracked by Enverus.
“The transaction answers a long-running question in the industry of if and when EOG would finally commit to a significant acquisition,” said Andrew Dittmar, principal analyst at Enverus Intelligence Research.
Including Occidental Petroleum’s 2019 acquisition of Anadarko Petroleum, since 2020 EOG’s large-cap peers ConocoPhillips, Diamondback Energy and Oxy have actively consolidated ownership in key U.S. unconventional plays, spending more than $140 billion in the process, he said.
“EOG has stayed firm … in its commitment to organic resource expansion and a focus on its core assets acquired in the early innings of shale,” Dittmar said. “While there is virtue in not pursuing increasingly expensive M&A transactions, it also risked EOG falling behind as undrilled high-quality inventory became increasingly scarce. Successfully executing on large-scale organic resource potential likewise became increasingly challenging as the major plays were discovered and delineated.”
Charles Mead, a Johnson Rice analyst, noted the similarities between the Yates and Encino deals during a conference call following the announcement on May 30. Specifically, both acquisitions targeted a private company in an emerging play.
Yacob confirmed that both transactions are consistent with EOG’s strategy.
“We’ve always talked about the way that we value [deals], whether it’s organic leasing, small bolt-on acquisitions or in this case, a transformative deal,” he said. “We view it through a returns lens, and so oftentimes that makes transactions in established basins a little bit less competitive with our existing portfolio because we’ve built so many things on a low cost-of-entry. Right off the bat, that steers you into potential transactions in emerging assets.”
Moreover, Yacob said, EOG has taken the time to develop relationships and a reputation that supports private negotiating.
“Similar to Yates, the relationship between Encino and EOG has been growing over the last couple of years since we’ve been involved in the basin, [and we] see a lot of similarities and alignments between the two companies.”
