Billing itself as “The New Devon,” Devon Energy Corp. announced in late November it would acquire GeoSouthern Energy's Eagle Ford oil play for $6 billion, advancing Devon's agenda to become more focused on liquids. The company also announced it would sell underperforming assets in the US and elsewhere as it zeros in on E&P.

GeoSouthern, one of the first companies to successfully execute in the Eagle Ford oil play, will continue to operate all of its other assets in the Texas Gulf Coast region and other areas. The Blackstone Group, GeoSouthern's corporate partner, will exit its stake in the company through this transaction.

At press time, the Eagle Ford purchase registered as the largest upstream M&A deal of 2013 and the largest Eagle Ford shale transaction to date, according to Jefferies & Co. Inc. Jefferies served as financial advisor to GeoSouthern.

Devon placed lofty expectations on the deal, saying it would boost company production in 2014 by nearly 40%, to more than 70,000 barrels of oil equivalent (BOE).

“With this transaction, we have secured a premier acreage position in the very best part of the world-class Eagle Ford oil play. This acquisition enhances our already strong North American portfolio by adding another low-risk, light-oil asset that provides outstanding well economics and self-funded growth,” said John Richels, Devon's president and chief executive officer.

“Furthermore, this transaction is expected to be immediately accretive to virtually every metric, including cash flow per debt-adjusted share.”

Anteing up

Some analysts questioned whether the Eagle Ford acquisition would be as accretive as Devon suggests. The company acquired largely de-risked assets including current production of 53,000 BOE per day and 82,000 net acres, with at least 1,200 undrilled locations. The risked recoverable resource is estimated at 400 million BOE, the majority proved reserves.

Baird Equity Research analysts said in a report on the deal that while the acreage is top tier for the Eagle Ford, it is limited in terms of inventory. With a target of about 230 wells per year, the inventory will be exhausted in 2018.

“We view this acquisition as positive from a near-term production/cash-flow growth perspective, but the positive impact [is] somewhat limited due to the short life of this drilling inventory,” the Baird report said.

But David Tameron, senior analyst for Wells Fargo Securities, said the purchase is positive for Devon because Wall Street and investors have questioned the company's remaining inventory levels.

“Today's acquisition adds tier-one acreage in a high-profile play, and unlike prior Devon acquisitions, provides immediate production visibility,” he said.

GeoSouthern is a top-10 producer in the Eagle Ford and was fourth in production in the play in spring 2013. The acquired Eagle Ford acreage is in DeWitt and Lavaca counties in Texas and is largely contiguous, with most of the position held by production. Average estimated ultimate recoveries in DeWitt exceed 800,000 BOE per well. Devon expects production rates to peak at 140,000 BOE per day.

Beginning in 2015, at a WTI price deck of $90, “we expect these assets to deliver a powerful pre-cash-flow stream of approximately $800

million per year and grow thereafter,” Richels said. “Needless to say, it is very unusual to find an opportunity in the heart of one of the best plays in the industry that provides a multiyear compound annual growth rate of roughly 25% that is self funding in year one.”

But Arun Jayaram, an analyst with Credit Suisse, questioned whether Devon could deliver a 25% per annum growth rate. He noted that in DeWitt County, where the bulk of the production is located, overall production rates have plateaued since first-quarter 2013.

On a gross basis, GeoSouthern has grown over the past six quarters by about 18%, he said.

“Your guidance suggests a pretty dramatic acceleration,” Jayaram said of Devon's projections.

Dave Hager, Devon's chief operating officer, said the assets have been de-risked and will be in full development mode. Currently, 16 rigs are working on the DeWitt acreage.

“We've been able to model the results of the downspacing on all the wells,” Hager said. In 2014, the company will drill 230 wells in the play. That compares to 200 this year, 60 of which are awaiting completion.

“We haven't seen the full impact of the 2013 drilling program,” Hager said.

The 2014 Eagle Ford development includes a capital spend of $1.3 billion and 19 rigs.

The new Devon? Richels said in a conference call he wants to further accelerate “the transformation of Devon.” To do so, the company will sharpen its focus on its asset base. “Assets within our portfolio that cannot grow to materiality or cannot deliver significant cash flow will be harvested,” he said.

To that end, the company will sell its Canadian conventional and noncore US assets. It will retain its Canadian heavy-oil assets as well as its positions in the Eagle Ford, Permian, Barnett and Anadarko.

Richels said the Eagle Ford assets are positioned to give Devon access to premium crude markets on the US Gulf Coast, meaning improvement on its cash margin per barrel. They also add to its oil production, while the monetization of gassy assets will eventually decrease gas production by 700 million cubic feet (MMcf) per day.

In October, Devon also positioned itself for midstream capital relief by combining its midstream assets with Crosstex Energy Inc. and Crosstex Energy LP to form a new business. The move preserves capital for Devon's E&P business.

The new company is expected to have adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of about $700 million in 2014, before synergies. Devon's market value in the company is about $6.5 billion, Richels said.

Patience pays

Devon has made few moves in recent years. One of its last major sales was the divestment of its Brazilian assets to BP for $3.2 billion in 2011. In 2010, it purchased a working interest in assets in Alberta, Canada, for $650 million.

“We have considered many acquisition opportunities over the past few years, but none have met our stringent criteria,” said Richels. “Our patience and disciplined approach have culminated in this outstanding opportunity, allowing us to secure these world-class light-oil assets at 2.5 times expected 2015 EBITDA. Companies with concentrated asset positions in the best oil plays in the country, such as the Eagle Ford, Bakken and Permian Basin, are trading at substantially higher multiples.”

“The addition of these assets leverages our core competencies,” Hager said. “The technical expertise and project management experience developed in our other large-scale, unconventional development plays provide us the skillset to efficiently develop these assets and optimize the value through improved recoveries and reduced costs.”

The acquisition will be funded with a combination of cash on hand and debt. Devon expects to repay the borrowings with free cash flow and proceeds from the monetization of noncore assets. The transaction is expected to close in the first quarter of 2014.

The legal advisor to Devon for the transaction is Skadden, Arps, Slate, Meagher & Flom LLP. Morgan Stanley and Goldman, Sachs & Co. served as financial advisors to Devon. The legal advisor to GeoSouthern is Simpson Thacher & Bartlett LLP.

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