The privately held Meritage Midstream Services has announced that it has purchased natural gas gathering and processing assets from Devon Energy (NYSE:DVN) and PVR Partners (UNKNOWN:PVR.DL). It's the second big announcement to come out of the Meritage camp in the Powder River Basin, after it struck an oil-by-rail deal with Arch Coal (NASDAQOTH:ACIIQ) in May. The interesting part of this story, however, falls on Devon's side of the line. Today we're going to take a closer look at the deal, and at what it says about the future for Devon's shareholders.
Meritage is picking up the entirety of Thunder Creek Gas Services, which includes about 540 miles of pipeline, three natural gas treating facilities, compression and gas processing infrastructure, as well as capacity to handle natural gas liquids and condensate. PVR Partners held a 25% stake in the project, but Devon held the majority stake and was the operator. The exact price of the deal has yet to be disclosed, but it is less than $300 million. More on this later, but let's get into Devon's motivation for the deal.
What about that midstream spin-off?
The obvious question is: Why would Devon jettison these assets right before it creates its midstream master limited partnership spin-off? Couldn't the company drop the assets down to its own MLP and generate the same amount of cash that way?
The reality is that the Powder River Basin is primarily an oil play, and though Devon spent the better part of a decade exploiting coalbed methane there, it is now completely shifting its focus to oil. It drilled five wells there last year, and plans to drill 35 there this year. There very well may be some Powder Basin midstream infrastructure handed down to its new MLP (details of which should be forthcoming this quarter), but they will be oil assets, not natural gas.
This is a deal that many investors may ignore, given its size. But upon closer inspection it offers up further proof that Devon's management is dead set on its goal to focus on its liquids business. Right this minute that means generating some cash by selling off non-core, natural-gas-oriented midstream assets. On its second quarter conference call, management acknowledged that the Thunder Creek assets, combined with some other non-core assets, sold for about $300 million. The assets would have generated only $15 million in cash flow for the full-year, so in other words, it was a great deal. All in all, the company is executing on its vision, and that is something every investor loves to see.
Fool contributor Aimee Duffy has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.