"From a strategic standpoint, we believe Devon's acquisition of Santa Fe Snyder makes sense," says William Featherston, senior vice president and E&P analyst for PaineWebber Inc. in New York. "We rate Devon a Buy and would use the recent weakness in its stock price as a buying opportunity. Our 12-month stock price target for DVN is $70 per share." Based in Oklahoma City, Devon Energy explores for, develops, produces and acquires oil and gas properties, mainly in New Mexico, West Texas, Oklahoma, Wyoming, the Gulf of Mexico and Alberta, Canada. Besides its domestic oil and gas assets in the Rockies, West Texas and the Gulf of Mexico, Santa Fe Snyder has international assets in Indonesia, Malaysia, Argentina, Brazil, China and West Africa. Pro forma the stock-for-stock merger, Devon's year-end 1999 reserves were 2.95 trillion cu. ft. of natural gas and 565 million bbl. of oil. "While the $3.2-billion acquisition price-which includes the assumption of debt--is rich on a barrel-of-oil-equivalent basis (Devon is paying about $8.34 per BOE for SFS), the merger is accretive [to Devon] on all key per-share measures of cash flow, earnings, asset value, production and reserves," says Featherston. The merger, which is expected to close this fall, adds critical mass to three of Devon's four core North American operational regions-the Gulf of Mexico, the Rockies and the Permian Basin of West Texas, he adds. "The synergistic property overlap of the two companies in these areas should help facilitate $30- to $35 million in cost savings. However, we are fairly confident that the cost savings will easily exceed $35 million, as Devon has a history of exceeding acquisition-related cost reductions." Additionally, he says the merger should improve Devon's internal growth profile and provide it expertise and additional assets in the international arena-essentially a prerequisite for larger E&P companies to generate attractive, sustainable growth. Pro forma the merger, Devon's balance sheet should be among the strongest in its peer group, says Featherston. "We expect 2001 debt/EBITDX (earnings before interest, taxes, depreciation and exploration expenses) to be 1.0, which compares very favorably with our E&P universe's average multiple of 1.6." He says the combined company should throw off pro forma free cash flow of $400 million, which could be used to further strengthen its balance sheet. "While the pro forma company trades at a discount to its E&P peer group, Devon is now better positioned than it was pretransaction," says Featherston. "We expect investors-initially concerned about the price per BOE being paid for Santa Fe Snyder-to embrace the transaction's accretive figures and strategic sense. In our view, the combination of Devon's long history of generating above-average returns, its internal growth profile, strong balance sheet, free cash flow, and improved market capitalization and liquidity, should enable it to quickly recapture the premium [enterprise value/EBITDX] multiple it has been generally afforded." Note: Analysis took place 5-26-00 when DVN closed at $55.63 and was reaffirmed 7-27 when $45.06. Currently, some 86.6 million common shares of Devon are outstanding; upon completion of the merger, an estimated 126 million common shares will be outstanding. The recent 52-week price range was $60.93-$29.50.

Comments