Encana Corp.’s (NYSE, TSE: ECA) formula for success is just a slight revision from oilman J. Paul Getty’s: Rise early, work late and snatch up other people’s oil.

Encana picked off its second major Texas target in 2014, announcing Sept. 29 it will buy Athlon Energy Inc.’s (NYSE: ATHL) premium Permian Basin land for $7.1 billion, including debt.

Athlon, which went public about 13 months ago, perfectly fits the Calgary-based company's strategy to aggressively hunt oil and liquids-rich plays. In June, Encana completed the acquisition of 45,500 net Eagle Ford acres in South Texas from Freeport-McMoRan (NYSE: FCX) for $3.1 billion.

The two companies jointly announced a merger agreement for Encana to acquire all of the issued and outstanding shares of Fort Worth, Texas-based Athlon's common stock for $5.93 billion, or $58.50 per share, in cash. Encana will also assume Athlon's $1.15 billion of senior notes, for a total transaction value of about $7.1 billion.

Encana had about $6.6 billion stockpiled from recent divestures, according to a report last week by Deutsche Bank AG.

Encana answered the number one question on investors' minds regarding the use of proceeds from the recent PrairieSky Royalty Ltd. spinoff and asset sales, said Mike Kelly, senior analyst, Global Hunter Securities.

“Athlon has been GHS’ top Permian pick due to its basin leading returns [measured by the recycle ratio] and third best five-year projected debt-adjusted per share production growth of 33% vs. Permian peers at 21%,” Kelly said.

The transaction represents a 25% premium to Friday’s close of $46.73 per share, said Gabriele Sorbara, vice president, E&P/energy research, Topeka Capital Markets.

“The acquisition does not come as a complete surprise, as ATHL was one of our top picks given its asset base and execution in the core Midland Basin,” he said.

Encana buys itself into a seventh growth area with Athlon’s assets. The company will gain Athlon's land position of roughly 140,000 net acres focused solely in the heart of the oil-rich Midland Basin. It expects the transaction to add current production of about 30,000 barrels of oil equivalent per day (boe/d), based on Athlon's current estimated production including recent acquisitions.

Liquids-Rich Strategy

Encana has already grown liquids volume 49% year-over-year, adding $270 million.

Encana’s Eagle Ford buy included acreage that produced about 53,000 boe/d in the first quarter of 2014 and has an estimated drilling inventory of more than 400 locations.

The Permian will play an important part within Encana's growth portfolio, contributing significantly to company-wide projected total liquids production of around 250,000 bbl/d by 2017.

Encana now expects to achieve its initial 2017 target to reach 75% of operating cash flow from liquids production in 2015, marking a major strategic milestone.

"This transformative acquisition further accelerates our strategy and provides us with a prime position in what is widely acknowledged as one of North America's top oil plays," said Doug Suttles, Encana president and CEO, in a statement. "The Athlon team has built an exceptional asset with massive running room that includes greater than 10 years of drilling inventory with up to 11 potential productive horizons of high-margin liquids."

Encana said last year it would invest about 75% of its 2014 capital in high-return oil and liquids-rich plays. In the past year, the company has significantly realigned its portfolio through divestitures of natural gas-weighted assets and the acquisition and development of higher-margin oil and NGLopportunities.

In addition to the $2.4 billion Prairie Sky offering, of which Encana retained 54% interest, in June, the company sold its Bighorn assets for $1.8 billion. The sale included 360,000 net acres of land along with Encana's working interests in all pipelines, facilities and service arrangements. Total net proved reserves at the end of 2013 were about 1,100 billion cubic feet equivalent (Bcfe), with about three quarters of those reserves being natural gas.

Encana has grown its liquids-rich portfolio to include operations in the Montney, Duvernay, D-J Basin, San Juan Basin, Tuscaloosa Marine Shale, the Eagle Ford Shale and now the Permian Basin.

"During our strategic review last year, we carefully studied North America's premier basins and identified the massive horizontal, multizone, development potential in the Permian," Suttles said. "Our strong balance sheet gave us the ability to act and capture this highly value-accretive opportunity. It is early days in the horizontal development of the Permian play and we see tremendous opportunity to enhance and accelerate value by applying our proven resource play model."

Big Surprise

Even though knowledge of Encana's strategy was well known, the deal still came as a surprise to some analysts.

David Tameron, senior analyst, Wells Fargo Securities LLC, said the firm was unaware of any ongoing process run by Athlon. However, it was widely known Encana was looking to buy additional assets.

"Most of the talk circled around Niobrara/Eagle Ford, so this morning's news came as a surprise to us," Tameron said. "From the Street perspective, it continues to validate the potential in the Permian and, in our view, is likely to push those names higher today.”

Based purely on the Encana/Athlon deal metrics, the acquisition implies a value of $98 per share for Diamondback Energy (NASDAQ: FANG), or a premium of 33%.

"Based on our calculation, ATHL will be acquired for $41.04 per proved boe, $236,667 per flowing boe of production and $33,571 per acre, when ascribing a value to production," Sorbara said.

He expects the transaction to close as it has been unanimously approved by both companies' boards. Athlon's management and sponsor—Apollo Capital Management—have also agreed to tender their respective shares.

Encana sees the potential for roughly 5,000 horizontal well locations with potential recoverable resource of about 3 Bboe.

In 2015, Encana intends to invest at least $1 billion of capital in the play and ramp up from three to at least seven horizontal rigs by year-end 2015.

The transaction is subject to the terms and conditions set forth in the merger agreement, including that at least a majority of the Athlon shares on a fully diluted basis have tendered to the offer, that the waiting period under the U.S. Hart-Scott-Rodino Act has expired or been terminated, and other customary conditions. Closing of the transaction is expected by year-end 2014.

Tudor, Pickering, Holt & Co. and Barclays are Encana's financial advisers and Paul, Weiss, Rifkind, Wharton & Garrison LLP, Vinson & Elkins LLP and Blake, Cassels & Graydon LLP are legal advisers to the company.

Evercore Group LLC and Goldman, Sachs & Co. are Athlon's financial advisers and Latham & Watkins LLP is its legal adviser.

Barclays also rendered a fairness opinion to the Encana board of directors in connection with the transaction.