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Devon Energy Corp. Unveils Bold Moves to Sharpen its Focus

By Matthew DiLallo - Dec 7, 2015 at 11:31AM

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Shale driller acquires more than $4 billion in assets to build out its core position in two key basins.

Talk about a merger Monday for Devon Energy ( DVN 0.43% ). The North American-focused driller, and its affiliates EnLink Midstream Partners (NYSE: ENLK) and EnLink Midstream, LLC ( ENLC 0.15% ), announced not one, but three separate transactions all designed to bulk up the company's core position in two emerging energy basins. In addition to that the company also announced that it will subsequently trim away some of its non-core positions so that it doesn't diminish its solid financial position amid the worst downturn in the oil market in years. With these deals Devon has secured compelling positions to drive growth today and in the future.

Details on the deals
Reports surfaced last week that something was brewing at Devon Energy with Reuters reporting that Devon was in talks to buy privately held Felix Energy for around $2 billion in cash-and-stock. That deal was subsequently finalized and announced on Monday with Devon shelling out $1.9 billion for Felix, which would give it access to another 80,000 net acres in the STACK play within the Anadarko Basin of Oklahoma. However, in addition to that deal, Devon Energy also announced that it was acquiring 253,000 net acres in the Powder River Basin for $600 million. In total, the company is issuing $1.35 billion in equity to the sellers and $1.15 billion in cash to seal these two deals.

Further, the company's EnLink Midstream affiliates have agreed to acquire Tall Oak Midstream and its equity partner EnCap Flatrock Midstream for $1.55 billion. The primary assets held by Tall Oak are the STACK Natural Gas System, the STACK Crude Oil System, and the CNOW Natural Gas system. Given Devon Energy's acquisition of STACK focused Felix Energy, this infrastructure system acquisition will enable Devon to grow its production in the region without facing infrastructure constraints because it will control critical infrastructure in the region.

Finally, Devon Energy also announced plans to sell a number of assets to strengthen its financial position and to refocus its attention around its core. The company is currently marketing its Access Pipeline in Canada and is planning to monetize 50,000 to 80,000 barrels of oil equivalent per day, or BOE/d of non-core production. The company estimates that these sales should generate proceeds of between $2 billion to $3 billion, which will top off an already strong financial position. 

Building scale, creating value
Devon's dual acquisitions in the STACK play vault the company to the top of the value chain in that play giving it a best-in-class position. Once the Felix Energy deal closes, Devon Energy will increase its industry-leading production from the region to nearly 80,000 BOE/d and the company will have amassed 430,000 net acres in the region, giving it 5,300 future drilling locations to grow production. Best of all, the STACK play has some of the best economics in the industry right now with Felix Energy's acreage generating a 40% internal rate of return on new wells at the current oil price. Further, EnLink's acquisition of Tall Oak will enhance the economics of Devon's newly acquired acreage because the vast majority of Felix Energy's acreage was dedicated to Tall Oak's midstream infrastructure.

Meanwhile, Devon's Powder River Basin acquisition in Wyoming will more than double the company's acreage position to 470,000 net acres. That gives the company the largest and highest quality acreage position in the industry, enabling Devon to improve its drilling returns. That said, while the current economics aren't quite as good as those from the STACK play, the overall resource potential is compelling with Devon estimating there to be several billion barrels of resources locked within the basin that can be developed when commodity prices improve.

Investor takeaway
Devon Energy entered the downturn in a position of strength due to its investment grade balance sheet, strong hedge position, and very economic drilling acreage. That strong foundation put it in the position where it could be opportunistic to strategically build industry leading positions in what it viewed to be emerging core plays. With the transactions the company announced, it has really sharpened its focus on what it views as a key growth driver for today -- the STACK -- and a compelling opportunity for tomorrow in the Powder River Basin. 

 

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Stocks Mentioned

Devon Energy Corporation Stock Quote
Devon Energy Corporation
DVN
$41.77 (0.43%) $0.18
EnLink Midstream, LLC Stock Quote
EnLink Midstream, LLC
ENLC
$6.76 (0.15%) $0.01

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