In late November, Devon Energy Corp. announced the acquisition of privately held GeoSouthern Energy’s Eagle Ford assets for $6 billion. The package includes 82,000 net acres (50% working interest), with 205 wells currently producing 53,000 barrels of oil equivalent (BOE) per day on a net basis, and an additional 1,200 gross undrilled locations with 400 million BOE in net risked resource.

Looking at the deal from an unadjusted dollars-per-acre standpoint, the price of $73,000 per acre is far higher than any other pure Eagle Ford deal made in the play, such as Marathon Oil’s acquisition of Hilcorp Energy's Eagle Ford assets ($24,000/acre), Penn Virginia’s acquisition of Magnum Hunter Resources’ Eagle Ford assets ($21,000/acre) and the Korean National Oil Corp.’s purchase of a one-third stake in Anadarko Petroleum's Eagle Ford position ($19,000/acre).

The high per-acre price paid by Devon is driven by the large number of producing wells and the volume of current production associated with the acreage—both far higher than those included in the deals cited above—and the strong half-cycle economics of GeoSouthern’s wells to date.

We estimate that the production history implies an average estimated ultimate recovery (EUR) of 704,000 BOE per well. If we factor the well cost and product splits disclosed by Devon upon announcing the deal ($9 million and 60% oil, 20% natural gas liquids, 20% dry gas) along with a price deck of $80 per barrel of oil, $37.80 per barrel of NGLs and $4 per thousand cubic feet (Mcf) of gas, we estimate that the pre-tax per-well net present value (NPV) risked 10% totals $8.6 million, for an internal rate of return (IRR) of 91%.

Nonetheless, this price will likely require Devon to improve recovery rates or lower well costs if it is to derive a high return from this investment. Devon may have reason to believe it can boost well performance—particularly in DeWitt County, where ConocoPhillips and Pioneer Natural Resources (GeoSouthern’s two main DeWitt peers) have averaged EURs of 900,000 BOE and 1 million BOE, respectively. Devon’s EUR guidance given by the company for DeWitt County (850,000 to 950,000 BOE of EUR per well) suggests it is counting on such improvements. This acreage will be jointly developed with BHP Billiton.

The two companies might tackle this challenge a number of ways. In a conference call following the announcement of the deal, Devon executives noted that lease geometry may limit the potential for raising EURs by drilling longer laterals. However, downspacing may be a feasible option. We estimate that Devon Energy’s location numbers imply 120-acre spacing (i.e., 205 producing wells, an estimated 26 completed wells awaiting tie-in and 1,200 undeveloped locations spread over 164,000 gross acres), but operators nearby (Pioneer Natural Resources in DeWitt County, Penn Virginia in Lavaca County) are already experimenting with 60-acre spacing.

Devon may also be able to increase frac intensity as well. For instance, GeoSouthern has pumped an average of 650,000 pounds of proppant per 1,000 feet of lateral on its recent DeWitt wells, but Pioneer has been using more than 800,000 pounds.

In addition to the DeWitt County acreage, the GeoSouthern package includes an estimated 240 locations in Lavaca County. GeoSouthern only has three completions in this county to date, but Devon’s estimate of 400,000 to 500,000 BOE per well appears in line with historical results achieved by Penn Virginia, the preeminent Eagle Ford operator in this county with 39 completions to date, which we estimate at 479,000 BOE per well.

This deal is an aggressive move by an operator intent on speeding up a transition toward more liquids-oriented development. How much value Devon Energy can derive from the acquisition remains to be seen, however.

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