Was This $6 Billion Purchase Worth It?

What can you buy for $6 billion? Well Devon Energy (NYSE: DVN  )  can purchase 400 million barrels of oil equivalent and 53,000 boe/d in extra production on an 82,000 net acre patch in the Eagle Ford. But with $6 billion Devon Energy could have bought ~25% of its stock back or started paying out a bigger dividend, so was it worth it?

More land, more drilling locations
Devon Energy purchased 82,000 net producing acres with at least 1,200 potential drilling locations. The justification Devon Energy gave was that the purchase was only 2.5 times 2015 EBITDA and would provide 25% compound growth over the next few years. Most of Devon's reserves in the play are proven, which leaves room for potentially recoverable resources to be found.

Asset sales and a different focus
Devon is paying for the transaction through free cash flow and sales of non-core assets. Devon has five plays in mind that it wants to focus on: the Eagle Ford, the Permian Basin, the Anadarko Basin, Canadian heavy crude (oil sands), and the Barnett shale. To help fund its projects Devon plans on selling off non-core assets.

In 2010 Devon sold $1.05 billion of Gulf of Mexico assets, which was supplemented by the $3.2 billion sale of its Brazilian assets in 2011. Going forward Devon is going to sell conventional Canadian and non-core U.S. assets.

With the additional cash Devon is investing in the best plays and can redirect the capex it would have spent elsewhere on its primary plays.

Devon Energy's purchase in the Eagle Ford will be easily justified if it can fulfill its guidance. Devon Energy plans on having a peak production rate of 140,000 bpd with $800 million in free cash flow being pumped out of the purchase starting in 2015, which will continue to grow after that.

2014 and beyond
In 2014 Devon Energy plans on spending $1.3 billion in the Eagle Ford to operate 19 rigs. Devon Energy averages a 80%-85% NGL and oil production mix from its acreage. $1.3 billion in the Eagle Ford will complete ~230 net wells, with ~200 in DeWitt County and ~30 in Lavaca County.

2017 is when Devon Energy plans on hitting its peak production rate, which would represent a compound growth rate of over 25%. By 2017 Devon Energy plans on making $2.5 billion in free cash flow from the acreage, which is huge. Devon Energy was so excited from its purchase that it released a whole new investor presentation in conjunction with its press release dubbed "The New Devon."

Devon Energy is serious about its five-play focus with the Eagle Ford being the jewel of Devon's crown. Devon plans to fund future investments in these plays through its asset sales and the public offering of its CrossTex midstream assets.

Devon Energy has plenty of company in the Eagle Ford, however, and Marathon Oil (NYSE: MRO  )  has similar ambitions. 

Neighbor
Marathon Oil produced 92,000 boe/d in the last week of October, and it plans to surpass 100,000 boe/d by the end of 2013. Marathon Oil is using the Eagle Ford to meet its 5%-7% compound annual growth rate, with output increasing between 8% and 10% in 2013. If the Eagle Ford can deliver, Marathon Oil can lean on U.S. onshore growth to meet or exceed guidance.

Marathon owns ~200,000 net acres in the Eagle Ford. Marathon added to its Eagle Ford acreage through the $590 million sale of its Gabon assets in Angola, which was used to purchase 4,800 net acres in the Eagle Ford for $97 million. 

Marathon Oil's future plans are similar to those of Devon Energy: sell off foreign assets to invest in domestic plays such as the Eagle Ford.

Final thoughts
Devon's splashy purchase seems to have been a great deal, assuming it can reach its target of $2.5 billion in free cash flow a year. Devon is right to invest more in the Eagle Ford, as the play offers high returns and low levels of risk due to its high liquid content. Devon Energy will be able to quickly repay the acquisition (which is expected to be completed in the first quarter of 2014) yet will reap rewards for over a decade.

Marathon Oil is right to focus on domestic oil plays. Shale is where Marathon's growth is coming from, so why not keep investing in what's working?

The boom isn't over
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