GeoSouthern Energy Corp. is, by tradition, not prone to selling assets. Still, in 2013 it decided to market its Eagle Ford position as the asset began to outgrow the company.

Devon Energy Corp. has for the past few years been a reluctant buyer, patient and disciplined about what it acquires. The company had considered some opportunities, but none had met its stringent criteria.

In November 2013, however, the private company that didn’t do divestments and the deliberate executives of a $30 billion corporation struck one heck of a deal. Devon agreed to acquire GeoSouthern’s holdings in the Eagle Ford Shale for $6 billion. It was the largest upstream acquisitions and divestitures deal of 2013 and the largest Eagle Ford Shale transaction to date, according to Jefferies & Co. Inc., financial advisor to GeoSouthern.

The transaction, closed in February 2014, is Investor’s Deal of the Year for 2013.

For Devon, the DeWitt and Lavaca county assets were a perfect fit. The company focuses on core plays with a goal of growing overall oil production by 20% annually. John Richels, Devon president and CEO, said the company recognized right away that GeoSouthern’s assets would be highly economic and fit its portfolio.

“We assumed there would be a relatively limited universe of buyers for an asset this size, particularly a company that could transact quickly and for all cash, as we could,” Richels said.

Still, what drove the deal was quality and scale. GeoSouthern’s production when the deal was struck was 53,000 barrels of oil equivalent per day (boe/d) across 82,000 net acres. At least 1,200 undrilled locations remain, with risked recoverable resource estimated at 400 million boe, the majority proved reserves.

“We were looking for great assets, we weren’t looking for assets that nobody else could buy,” Richels said.

Steve Hanks, GeoSouthern’s general manager of finance, said the company started reviewing its holdings in second-half 2012: acreage developed, future growth potential and exit timing.

The company’s DeWitt County acreage was held by production. GeoSouthern had initiated downspacing pilots, increased its rig count and transitioned to pad development.

“At that point, we felt like the majority of the value of the asset had been captured and taking the asset to the next level would be better accomplished by a larger organization,” Hanks said. “That’s what prompted us to think about strategic alternatives.”

The company could either take on the drilling risk or sell.

The headache: GeoSouthern wasn’t selling a business for $6 billion. It was selling one asset.

Devon was on a shortlist of potential buyers, given the asset’s size. The pitch also went out to a select audience that included a few majors, super independents and European companies.

“Because of the concentration of value, that limited the field. Devon was one of the few we talked to,” said Richard Borstmayer, GeoSouthern’s general manager of operations.

To preserve confidentiality, the company avoided broader marketing. “We were very concerned about the sale process leaking to our employees and causing unnecessary concern,” said Deborah Hubbs, general counsel and general manager of business development.

Earthwork

GeoSouthern was one of the Eagle Ford’s trailblazers, and its employees had worked hard to prove up their holdings.

Years earlier, Meg Molleston, vice president and COO, saw opportunity in DeWitt County. She presented the idea to George Bishop, founder and CEO, and the company began leasing in late 2006. It drilled test wells in 2008, and the first economic well came online in late 2009.

Petrohawk Energy Corp. stepped in shortly thereafter to make an offer to GeoSouthern and its then partners: $3,000 an acre.

“George and Meg said, ‘No way, we’ll roll the dice,’ ” Hubbs said.

People questioned their business acumen for not selling to Petrohawk, but it turned out to be a good bet. On a raw basis, the company ultimately sold to Devon for $73,000 per net acre, a price that reflects the enormous increase in oil production over the past four years.

Along the way, GeoSouthern formed a joint venture with Petrohawk in April 2010, and Petrohawk was purchased by BHP Billiton in August 2011.

GeoSouthern secured mezzanine debt financing to appraise the acreage and keep up with Petrohawk--a necessity in order to hold rights to acreage in wells.

In early 2011, the company received $300 million in equity financing from The Blackstone Group. The equity infusion allowed GeoSouthern to develop a proved developed reserve base that would support a revolving credit facility providing capital for future development.

“The equity allowed us to participate in the wells drilled by Petrohawk,” Hubbs said. “If we didn’t participate, then we lost the rights to the acreage in those wells. The support we received from Blackstone, and the timing of it, was critical to the success of the program.”

GeoSouthern faced other challenges. Frack crews were in high demand.

“I can remember early on in 2010 having 13 wells waiting on frack,” Borstmayer said. “By year-end, we were approaching 30 waiting on frack at one time with no real means of catching up. Frack crews were impossible to find.”

GeoSouthern pressed ahead, and development progressed from a single producing well in 2009 to more than a dozen in 2010. By the time the company closed with Devon, GeoSouthern had more than 350 producing wells.

In the final 18 months it owned the asset, GeoSouthern was a top five operator of Eagle Ford oil and gas volumes, had multiple top 100 Eagle Ford wells and was ranked as the top privately held liquids producer.

All aspects had aligned for a sale. Starting with a board meeting in January 2012, the company devised a strategy to ultimately capture the full downspacing value.

Don Hausen, GeoSouthern’s general manager of exploration and new ventures, described the strategy as predicting downspacing results using reservoir simulation and then confirming those predictions with actual well performance. “We worked with Bill Von Gonten in early 2012 to model incremental unit recovery factor with increasing well density,” Hausen said. “During that time, we also collaborated with BHP to drill a 40-, 50-, 60- and 80-acre downspaced pilot program. Toward the end of 2012 it became clear that Von Gonten’s simulation results were being confirmed by actual well performance from the pilot program.”

The Rookies

Devon, for its part, was no stranger to the Eagle Ford.

“It’s certainly one of the best and most exciting oil opportunities in the country,” Richels said. “We had done a significant amount of work on the Eagle Ford and understood it pretty well.”

The company was already on its way to reshaping its strategy as the “New Devon”--a move to target low-risk, light-oil assets that could provide outstanding well economics and self-funded growth.

“We did have that in mind and were moving in that direction, but this provided a good trigger for us to do it,” Richels said. “The strategy that we’re following is to focus our employees and our capital in large core areas. When we talk about core areas, what we mean is areas in which we have a large enough interest and enough prospects to move the needle for a company our size.”

GeoSouthern’s asset fit the profile. It provided “this great entré into the Eagle Ford in a very meaningful way. It allowed us to establish the Eagle Ford as one of our core areas,” he said.

Still, much negotiation and due diligence remained once a buyer was found.

"We were all relative rookies for a $6 billion deal," Hubbs said. "None of us had ever done a deal of this magnitude."

Richels considers the Eagle Ford one of the best and most exciting oil opportunities in the country. Devon’s 2014 capital budget for the shale is $1.1 billion and includes 19 rigs.

When Devon was contacted by GeoSouthern, Richels understood the geology and realized the position was, clichés aside, “the heart of the heart of the play.” It’s highly productive pay zones were ideal.

“It’s the most commercial part of the Eagle Ford play,” he said. “From all those points of view, we were interested in pursuing this transaction.”

Still, Devon was cautious, according to Hubbs. It didn’t know much about GeoSouthern, which at the time didn’t even have a website.

“We had a lengthy negotiation process with Devon,” she said.

Much has been said about the asset being the “core of the core,” Hausen said. His view is it unquestionably has those characteristics.

“If you look at this particular asset in terms of permeability, porosity, thickness, pressure gradient and fluid properties, it’s clear that Devon acquired the premier position in the Eagle Ford,” he said. “It’s the perfect storm of all reservoir parameters. There is so much oil and gas in place.”

Borstmayer likened the divestment to selling the Hope Diamond. “The asset really spoke for itself,” he said.

By third-quarter 2013, GeoSouthern began to see a production response from its shift to full-field development earlier in the year, according to Borstmayer.

GeoSouthern was able to re-engage Devon, meeting with their executive team in September. “We spent the better part of October updating the Devon team on the asset’s performance, downspacing results, and revised forecasts and ultimately received the $6 billion bid on October 28,” Hanks said.

That had been the goal all along.

“That was the number we were given by our leadership team to get,” Hubbs said. “So to be able to deliver on the expectations of the partnership was pretty rewarding."

Diligent stewards

The mismatch between Devon and GeoSouthern created some problems for the smaller company, which still had to steward its property.

Devon performed extensive title and environmental checks. It ultimately found no problems. Before doing the deal, Richels wanted to meet with principals of GeoSouthern, including Bishop, who is semi-retired.

“John Richels wanted to assure himself that he was doing business with good people. So before we signed the agreement, John met with George to confirm Devon was making a good decision,” Hubbs said.

Once the deal was on, Devon’s army of personnel overwhelmed GeoSouthern’s 185 employees. On the road to closing, the team spoke daily to Devon executives in Oklahoma City, and Devon employees took up residence in GeoSouthern’s office.

Then the deal was done.

Hanks said he experienced the full range of emotions following closing.

GeoSouthern’s team should feel proud, Richels said. “As a small company, they put together a tremendous asset base.”

For Richels, the excitement in the deal came from adding value to Devon. The company plans to ramp up production from 2013 levels of about 40,000 boe/d to 70,000 to 80,000 boe/d for the 10 months it owns the assets in 2014. In 2015, production is estimated to grow north of 100,000 boe/d and by 2017, to 135,000 boe/d.

“This is a transaction I’m very excited about, because it really does further our long-term strategy,” Richels said. “And it’s become a key part of our focus as a company. We’re really focusing our people and our capital on our core areas in the Eagle Ford, Permian, Barnett, Anadarko Basin and heavy oil in Canada.”

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