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Did Devon Make the Right Move by Selling Canadian Assets?

Over the past few years, Devon Energy (NYSE: DVN  ) has offloaded all of its international assets to focus on more profitable, liquids-rich opportunities in the US. It recently announced the sale of some of its Canadian oil and gas assets to a Canadian energy producer. Let's take a closer look at whether it was a good move.

Devon offloads Canadian assets
On Wednesday, Devon announced that it's selling the majority of its Canadian conventional assets to Canadian Natural Resources (NYSE: CNQ  ) for C$3.125 billion, or US$2.8 billion. The assets include natural gas and light oil properties representing proved reserves of approximately 170 million barrels equivalent as of the end of 2013.

The transaction is expected to close early in the second quarter. Once it closes, Devon plans to immediately repatriate the net proceeds back to the U.S. to repay debt incurred to finance its acquisition of Eagle Ford assets late last year. This will help further bolster its already robust balance sheet, which boasted $6.1 billion in cash and equivalents as of the end of last year.

Further, the metrics of the deal came in better than expected, with the price paid by Canadian Natural higher than many analysts had anticipated. The $2.8 billion price tag for the assets values them at approximately 7.0 times last year's EBITDA, which is significantly higher than Devon's current EBITDA multiple and also much higher than the multiple it paid for its recently acquired Eagle Ford assets.

The transaction was also favorable from a tax perspective; after adjusting for Canadian taxes and taxes on repatriation of funds to the U.S., Devon expects to receive net proceeds of approximately $2.7 billion. The favorable terms of the agreement highlight Devon's exceptional deal-making skills and its consistency in pursuing highly value-accretive transactions.

A highly capable dealmaker
Consider its November purchase of Eagle Ford assets from GeoSouthern Energy, for instance. The purchase, which was last year's largest upstream acquisition, will be immediately self-funding and is expected to generate roughly $800 million of free cash flow per year starting in 2015. It also fits nicely with the company's strategy of boosting oil output to improve its production mix.

Similarly, Devon's decision to merge its midstream assets with Crosstex Energy (NYSE: ENLK  ) to form EnLink Midstream has also been highly value-accretive. The company's ownership interest in EnLink is currently valued at more than $8.3 billion, representing an increase of more than $8 per share since the announcement was made. As EnLink expands and develops its assets in the years ahead, additional value should accrue to Devon and its shareholders.

Devon has also demonstrated its deal-making proficiency in more subtle ways. For instance, management was able to repatriate the proceeds from its international asset sales in 2010 and 2011 back to North America at a much lower-than-expected tax rate of just 5%, resulting in an incremental benefit of $400 million, or roughly $1 per share, to company shareholders.

The new Devon
Going forward, Devon plans to divest additional non-core U.S. assets, for which it is seeing strong buyer interest. It expects to complete its divestiture process by year's end. When all is said and done, Devon should find itself with a truly enviable portfolio capable of generating even stronger returns in the years ahead.

Its new asset base will consist of three core high-margin, liquids-rich plays, including the Eagle Ford, the Permian Basin, and the Canadian oil sands, which should help drive annual oil production growth of around 20% over the next several years. At the same time, Devon still maintains sizable stakes in the Barnett shale and Anadarko basin, which offer a great deal of natural gas optionality.

For investors seeking liquids-focused growth while still maintaining exposure to natural gas, look no further than Devon. With a disciplined, shareholder-friendly management team focused on per-share results, a diversified, high-quality asset portfolio, and an attractive valuation, the company remains a great long-term buy.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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9/4/2015 4:01 PM
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