After Devon Energy (NYSE: DVN) began its transformation by selling off $1.3 billion of deepwater oil assets to folks like Maersk and Petrobras (NYSE: PBR), I figured that we'd see a steady trickle of similarly sized sales, adding up to Devon's projection of $4.5 billion to $7.5 billion in after-tax proceeds. BP (NYSE: BP) has changed that equation today. The company has grabbed all of Devon's remaining deepwater Gulf of Mexico assets, plus valuable stakes in Brazil and Azerbaijan, for $7 billion.
While that's a pre-tax figure, Devon is clearly going to meet or exceed the high end of prior guidance on the divestiture program. The company now expects ultimate after-tax proceeds of $7.5 billion to $8.3 billion.
That's a lot of moola, even for one of the country's largest independents. Devon did $4.7 billion in operating cash flow in all of 2009. So what's the company going to do with all this cash?
Transocean (NYSE: RIG) and National Oilwell Varco (NYSE: NOV), which have smaller opportunity sets than Devon, have both announced large special dividends in recent months. A return of capital by this company, most likely in the form of share repurchases, is certainly on the table. However, higher priorities appear to be acceleration of onshore development and debt reduction.
Following a debt paydown, Devon will be a veritable financial fortress. Even if the market takes another frightening turn for the worse, the company has assured us that it will not face a situation like Chesapeake Energy (NYSE: CHK) had on its hands in late 2008, when bankruptcy seemed like an actual possibility.
On the development front, Devon's shale gas opportunities range from the big daddy Barnett to newer plays like the Haynesville and the Cana Woodford. As far as oily targets go, the company has its heavy oil projects up in Canada (now expanded through a joint venture with BP), and a presence in the Permian and the Granite Wash. With the latter play shaping up to be really promising for those in the core, I wouldn't be surprised to see Devon make a move here. I think someone like Questar (NYSE: STR) could be persuaded to part with its position, for the right price.
In short, Devon has plenty of places to put these sale proceeds to economic use. I believe shareholders should trust that the money won't go to waste.
