Core Overload? Devon’s Powder River, Anadarko Deals Knock Back Stock

In Devon Energy Corp.’s (NYSE: DVN) most significant transactions of the year, the company had all its gears turning as it engineered two deals in the Anadarko and Powder River basins totaling $2.5 billion.

Devon said Dec. 7 that it agreed to buy 80,000 net surface acres with up to 10 prospective zones in the Anadarko’s Stack play from privately-held Felix Energy in a transaction the company said adds another core play to its portfolio. Devon also agreed to purchase 253,000 net acres in the Powder River for $600 million from an undisclosed buyer.

Devon said it plans several divestitures in 2016 to offset debt and pay capital expenditures and expects proceeds of $2- to $3 billion.

Analysts questioned the Stack deal in particular and why Devon would add to its inventory when it already appears well stocked. Investors sent the stock plummeting by 10% by 2 p.m. CST, driving the company’s market cap down roughly $1.9 billion from Dec. 4’s close.

In a related $1.55 billion deal, Devon’s spinoff midstream company EnLink Midstream Partners LP (NYSE: ENLK) reached an agreement to buy Ten Oak Midstream in the core of the Oklahoma Stack. The vast majority of the Felix acreage position is dedicated to that midstream acreage.

Dave Hager, Devon’s president and CEO, said the three deals highlight the lucrative relationship between Devon and EnLink. Devon owns about $3 billion worth of EnLink and anticipates distributions of $300 million from the MLP.

“We leveraged the midstream relationship to secure the Felix transaction,” Hager said. “The EnLink relationship gave us a strategic advantage in this transaction. We would not have been able to place the value on Felix that we did unless EnLink controlled the midstream.”

The same was true of the EnLink’s Tall Oak acquisition.

“Knowing that Devon controlled the upstream assets and pace of development created differentiating value” for the MLP, Hager said.

Saturated

While the deal adds the potential for game-changing resources, analysts were cautious about the deal.

Bob Brackett, senior analyst with Bernstein Research, said both assets make sense from an operations point of view. Both are located in basins where Devon is a major operator and knows the geology, he said.

The wells purchased in the Powder River Basin appear to be legacy RKI Exploration & Production LLC, Brackett said. In August, RKI sold its Permian Basin leasehold to WPX Energy Inc. (NYSE: WPX) for $2.75 billion.

Brackett said he was “somewhat surprised at the price of the Stack deal.”

“Our concern is that the stacked pay potential is clear, but the level of inventory Devon already has is significant,” he said. “The time to wait to monetize the various zones seems sufficiently long that the time value of money of those locations is significantly diminished.”

David Kistler, analyst with Simmons & Co. International, questioned the use of equity and the healthy premium paid for the Stack assets “without a clear line of sight to a recovery in oil prices.”

While the acquisition adds another core similar to the Eagle Ford, Wells Fargo Securities LLC was equally edgy about the deal.

“We think the stock likely comes under pressure,” said David Tameron, senior analyst with Wells Fargo. Indeed, in early trading Dec. 7 Devon shares fell roughly 7%.

“Levering up in this environment will not be well received,” he said. The “Felix price tag looks rich and some conversations last week regarding this potential transaction had investors questioning what we don’t know about their Permian position.”

Hager said the acquisitions are immediately accretive.

“At strip pricing, these transactions boost our cash per share in 2016 by a few percentage points and that increases to above 10% in 2017 and beyond,” he said. “Our cash margin also expands by 5% pro forma for the transaction.”

Devon will pay for its Powder River and Stack tabs using $1.5 billion of cash on hand and another $1.35 billion of equity issued to the sellers.

Coreward

Hager said that the Felix acreage was long at the top of its list for a deal.

“In our opinion, this is the best emerging development play in North America that combines some of the best attributes of our Eagle Ford and Delaware positions,” he said.

With the acquisitions, Devon plans to add up to 10 gross rigs in the Stack, focusing primarily on the Upper Meramec play at a cost of $500 million. The rigs will target the volatile oil window.

The Stack acquisition adds 80,000 net surface acres in the over‐pressured oil window.

In the Powder River Basin, the company acquired 253,000 net surface acres in the core of the oil fairway at a price of about $1,100 per undeveloped acre. The $600 million purchase includes $300 million in equity and $300 million cash.

The acquisitions and existing acreage in the Powder River establishes a core area with:

• Net acreage of 470,000 acres;
• Risked locations of at least 1,300; and
• Further increases resources of “several billion barrels.”

Hager said Devon’s acquisitions further sharpen the company’s focus on the best economic plays in North America.

“They materially expand our position in industry‐leading positions in best emerging development plays,” he said.

Exits Marked

Devon plans to sell off noncore upstream assets in 2016 to reduce debt.

To fund its $2.5 billion capital program in 2016, Devon is marketing its Canadian Access pipeline with expected proceeds of $2 billion to $3 billion. Hager said the pipeline should be sold by early 2016.

The company specified that assets in Carthage, the Mississippi Lime, Granite Wash and select parts of the Midland Basin will be candidates for divestment. They produce 50-80 thousand barrels of oil equivalent per day (Mboe/d).

The company is already auctioning 33,900 net leasehold acres in the Permian Basin, according to EnergyNet.

In one package, Devon Energy Production Co. LP and Summit Discovery Resources LLC are selling 100% gross working interest with operations (before payout) in 14 wells located in north western Crockett County, Texas. Net revenue interest is about 74%.

Additionally:

• Lone Star Exploration Inc. receives a 20% back-in once payout occurs;
• 33,400 gross acres expire when continuous development expires on Shannon Estate (Jan. 7); and
• 1,040 HBP leasehold acres.

Six-month average 8/8ths production is 198 barrels of oil per day (bbl/d) and 158 thousand cubic feet per day (Mcf/d).

In a separate offering, Devon is auctioning three wells in Crockett and Upton counties, Texas, with an average 7% gross working interest before payout.

Six month average 8/8ths production is 113 bbl/d and 169 Mcf/d. The asset's average five-month income is $78,787 per month.

The auctions open for bidding on Dec. 9 and close Dec. 16. Information is available at energynet.com or by contacting Ethan House, EnergyNet's vice president of business development, at 405-255-5444.