After divesting the vast majority of its international oil and gas assets in Brazil, the Gulf of Mexico and Azerbaijan back in 2010, Devon Energy (NYSE:DVN) has been focusing its efforts on onshore U.S. energy plays, especially the Permian Basin and the Mississippian-Woodford trend.
Now, the company is finally making a big move into the Eagle Ford shale, a highly prolific liquids-rich play in southern Texas. Let's take a closer look at whether or not its decision will pay off.
Devon's big move into the Eagle Ford
Late last month, Devon announced it would purchase GeoSouthern Energy Corp.'s assets in Texas' Eagle Ford shale for $6 billion in cash. The acquired assets included 82,000 net leasehold acres, with production of roughly 53,000 barrels a day and estimated reserves totaling 400 million barrels. The transaction, which is the largest acquisition of exploration and production assets this year, is expected to close in the first quarter of 2014.
Though Devon paid a heavy price for its Eagle Ford assets, it will likely be rewarded handsomely over the next several years, given that the acquired acreage will be immediately self-funding and is estimated to generate roughly $800 million of free cash flow per year starting in 2015. The acreage has also been derisked, meaning Devon's drilling program will consist largely of low-risk, repeatable drilling.
Most of the acquired acreage is located in Texas' DeWitt county, which boasts some of the most prolific wells in the entire Eagle Ford, with average estimated ultimate recoveries (EURs) in excess of 800,000 BOE per well. Furthermore, the acreage features roughly 1,200 undrilled locations and is mostly held by production, giving Devon plenty of room to accelerate activity over the next few years.
Other companies seeing success in the Eagle Ford
With its newly acquired acreage, Devon joins a host of world-class operators that have seen tremendous success in the Eagle Ford. For instance, ConocoPhillips (NYSE:COP), which boasts 227,000 net acres in the play, saw third-quarter Eagle Ford production surge 66% year-over-year to 126,000 BOE per day. As the company works through its remaining inventory of roughly 1,800 undrilled locations in the play, it expects Eagle Ford production to grow at a 16% CAGR through 2017.
Similarly, Chesapeake Energy (NYSE:CHK) saw third-quarter Eagle Ford net production surge by 82% year-over-year to 95,000 barrels of oil equivalent per day. With plans to boost its rig count in the region to 15 next year, up from 10 currently, and with roughly 3,400 remaining undrilled locations, the Eagle Ford will undoubtedly be one of Chesapeake's key drivers of growth over the next several years as the company works to improve its commodity mix by transitioning away from natural gas.
Last but certainly not least is EOG Resources (NYSE:EOG), which delivered 39% year-over-year companywide oil production growth during the third quarter, thanks to its dominant position in the Eagle Ford. Not only is it the top producer in the play, it's also one of the most profitable, with its wells currently generating a direct after-tax reinvestment rate of return greater than 100%. With a 12-year inventory in the play, EOG expects big things in the Eagle Ford for years to come.
What to expect from the new Devon Energy
Though it used to be heavily weighted toward natural gas, Devon has made impressive strides in improving its commodity mix over the past few years, thanks largely to oil production that surged from 106,000 barrels per day in 2010 to 165,000 barrels per day in the third quarter. Liquids now account for 43% of the company's total production, up from 37% a year earlier.
With its recent Eagle Ford acquisition, the company will add production of roughly 30,000 barrels of oil per day and 11,000 barrels of natural gas liquids (NGLs), which should further improve its commodity mix. Devon expects its Eagle Ford production to grow at a compound annual growth rate (CAGR) of 25% over the next several years, with a peak production rate of roughly 140,000 BOE per day.
Next year, it expects to spend $1.3 billion in the play, with plans to drill roughly 230 wells with a 19-rig drilling program. In addition to its recently acquired Eagle Ford assets, Devon also commands premier positions in the liquids-rich Permian Basin and the Mississippian-Woodford trend, where it has 1.3 million and 650,000 net acres, respectively.
The bottom line
With thousands of low-risk, undrilled locations between these three plays, Devon has plenty of room to continue growing its North American liquids production at double-digit rates for years to come. Given the company's attractive valuation, its disciplined, returns-focused management team, and a newly expanded runway for liquids growth, Devon is one energy stock every investor should strongly consider.