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Late last year, Devon Energy (DVN +0.64%) unveiled a bold new plan to sharpen its focus around its core assets. The first phase of that plan saw the company spend billions to create industry-leading positions in two of the best emerging oil plays in America. That was a bold statement for the company because it came amid one of the deepest downturns to hit the industry in decades. Further, due to those acquisitions, the company needed to perform some serious portfolio reshuffling in order to keep its balance sheet in tip-top shape. It was able to do just that this week, when it announced a number of asset sales as it continues to make progress on its plan to strengthen its core.
Details on the deals
Despite the wild ride commodity prices took to start the year, Devon Energy was able to secure several buyers for assets that it no longer deemed as core. In total, the company has now signed deals to sell $1.3 billion in assets.
The largest deal was for the company's natural gas assets in East Texas, which fetched $525 million. Those properties were producing 22,000 barrels of oil equivalent per day, or BOE/d, though only 5% of that production was oil. In addition, the company sold its non-core position in the Anadarko Basin's Granite Wash area for $310 million. Again, these were natural gas heavy assets, with the 14,000 BOE/d of production only being 13% oil. Finally, the company sold its overriding royalty interest across 11,000 acres in the Midland Basin for $139 million. That property was only producing 1,000 BOE/d.
Image source: Newfield Exploration Co.
When these sales are added to the $200 million non-core Mississippian transaction the company previously announced, they bring the asset sales total roughly $1.3 billion. That puts Devon Energy well on its way to hit its target of selling $2 billion to $3 billion in assets this year. In fact, the company said that it is seeing encouraging interest in its remaining non-core oil assets in the Midland Basin as well as its Access Pipeline in Canada, the sale of which the company expects to be able to announce some time in the next several weeks.
What's next for Devon Energy
Once Devon Energy concludes its remaining planned asset sales, it will have completed a pretty significant shift. Not only will it have bulked up on assets in two of its emerging core regions -- the STACK play northwest of Oklahoma City, and the Powder River Basin across southeastern Montana and northeastern Wyoming -- giving it leading positions across four top-tier, oil-rich shale plays, but it will also have solid positions in the Canadian oil sands region and the gas-rich Barnett Shale of Texas. Further, the company will have significantly bolstered an already-strong investment-grade balance sheet. If fact, when adding in the company's most recent asset sales, it's sitting on roughly $2.5 billion in cash.
That cash position gives Devon Energy the ability to accelerate its drilling activity once it feels confident in the price of oil. In particular, the company is most excited about accelerating the development of the STACK play, where it paid $1.9 billion to bolster its position over the last year. The reason it was willing to pay such a high price was due to the low well costs and high production rates of the play, which lead to strong drilling returns.
Devon Energy isn't the only oil company to pay a pretty penny to recently bulk up its position in the STACK. Last month, rival Newfield Exploration (NFX +0.00%) paid $470 million to acquire an additional 42,000 acres in the play. At more than $10,000 an acre, that was an expensive purchase. In fact, when adding Newfield Exploration's cumulative acreage acquisitions in the region, that sale only bumped up its average acreage acquisition price to $3,000 an acre. That being said, both Newfield Exploration and Devon Energy felt these lofty prices were justified, given that the STACK is one of the few oil plays that is still very profitable to drill in the current environment.
Investor takeaway
Devon Energy has really remade itself during the energy price downturn. It has sharpened its focuses around its core plays, while also significantly bolstering its balance sheet. This puts the company in the position to deliver tremendous future production and earnings growth as oil prices continue to rebound.
