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.”

To enjoy the rest of this article, read the January 2014 issue of Oil and Gas Investor.

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