Devon Energy (NYSE:DVN) is an oil and gas producer on the move. Not only is the company seeing success in its organic exploration and production efforts, but it also announced a slew of new initiatives designed to clear the path for the future.
The 'New Devon Energy', to use the company's own words, will be a different one than investors knew just a few years ago. Here's why these developments are worth keeping an eye on.
Devon Energy: A company transforming itself
Devon Energy management has taken the company though a strategic transformation, gearing itself up for the boom in domestic oil production. The new Devon will continue to excel in its core competencies as well as gain entry into promising fields. A key part of this is Devon's decision to combine substantially all of its midstream assets with Crosstex Energy (NYSE:ENLC) to form an entirely new midstream business.
The new midstream business should generate adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, of about $700 million. This is a sound strategic partnership since the combination of the midstream businesses, which includes pipelines and processing facilities, are located in key oil and gas regions in the United States. The new company will hold 7,300 miles of pipelines and 13 processing plants in the highly productive Barnett Shale, Permian Basin, and Gulf Coast regions.
This partnership will boost their efforts in natural-gas liquids, an area natural gas midstream MLP Energy Transfer Partners (NYSE:ETP) knows well. Distributable cash flow over the first nine months of the year totaled $1.37 billion, up $414 million from the same period last year.
Like its peers, Energy Transfer Partners is actively acquiring assets to fuel future production. The bulk of the company's cash flow growth this year was due to its 2012 acquisition of Sunoco, and in all, Energy Transfer Partners has put into place $2.1 billion of growth projects that are now coming on-line and are clearly paying off.
Devon was already a strong company, evident by its year-to-date results. Devon booked a $151 million profit over the first three-quarters of this year, reversing the $227 million loss from the same period last year. Devon delivered 38% production growth in its U.S. oil operations, thanks to the hugely successful Permian Basin. Of course, natural gas and natural-gas liquids represent key segments for Devon as well, and total production of oil, natural gas, and natural-gas liquids averaged 691,000 barrels of oil equivalents per day in the third quarter.
Plenty of profits in the pipeline
Devon doesn't plan on slowing down. There are still areas in the United States that Devon hasn't taken advantage of, including the highly promising Eagle Ford onshore fields. This is all about to change, since Devon recently struck a deal to acquire privately held GeoSouthern Energy for a tidy $6 billion.
GeoSouthern Energy is based in Texas and has significant operations in the nearby Eagle Ford formation, which is one of the fastest-growing fields in the United States. Consider that the Eagle Ford region in Texas holds a massive amount of resources, and production is ramping up. The U.S. Energy Information Administration reported that total production from Eagle Ford reached 1 million barrels per day in August, and is poised to grow even further in the months ahead.
Devon expects benefits from the acquisition almost immediately. The deal is expected to boost cash flow per share by 5% next year and by a double-digit percentage thereafter. Earnings are expected to grow 20% in 2014 as a result of the acquisition.
The bottom line
Devon was already a strong company, and its strategic initiatives will likely improve its position. The move to create a new midstream business with Crosstex will provide investors even more options, and will be accretive to both Devon and Crosstex.
Furthermore, its acquisition of GeoSouthern gives Devon access into critically important oil-producing regions in the United States that have vast amounts of resources available. As a result, investors will soon have a new Devon Energy on their hands, and would be wise to monitor the company to make sure its plan is proceeding smoothly.
One investor's dream is another OPEC's nightmare