Devon secures low-risk, light oil asset with strong well economics and self-funded growth
The Oklahoma City, OK-based company will acquire Eagle Ford assets that include current production of 53,000 barrels of oil equivalent (boe) per day and 82,000 net acres with at least 1,200 undrilled locations. The risked recoverable resource is estimated at 400 million barrels of oil equivalent, the majority of which is proved reserves. Devon estimates peak production from the acquired assets, located in DeWitt and Lavaca counties, will be 140,000 boe/d.
Currently, US oil accounts for 12% of Devon’s total volumes. In a report released today, Robert Christensen, an analyst at Canaccord Genuity, says the Eagle Ford acreage is a “great fit” for Devon as the company “was first to develop on a ‘mass manufacturing basis’ in the Barnett Shale.” This experience, coupled with an estimated $4.3 billion of cash on hand, could grow production 31% in 2014 and 23% in 2015, he continued, noting that GeoSouthern produced 23 MMboepd in 2012 – an amount that, alone, would increase Devon's US oil volumes by over 25%.
Christensen added “We believe that greater oil growth and a higher mix of oil as a share of its total output are key elements to DVN receiving a higher valuation for its deeply undervalued E&P business.”
GeoSouthern holds a 50% working interest in 173,000 gross acres in the Black Hawk field with partner BHP Billiton. The company also has 68,000 net acres further north in Fayette County.
The Woodlands, TX-based company’s early entry into the liquids-rich play helped secure its current position as the 4th largest oil producer in the play and, as noted in the October OGFJ100P, the No. 1 privately-held liquids producer by early 2013 estimates.
"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 CEO. "Furthermore, this transaction is expected to be immediately accretive to virtually every metric, including cash flow per debt-adjusted share."
For Devon, the price of shoring up its light oil inventory amounts to roughly $113,000 per flowing boe (without crediting value for acreage or other assets purchased in the deal), according to calculations by Jefferies & Co. analysts.
“This compares to Oasis' recent purchase of Zenergy assets in the Bakken for over $160,000 per flowing boe (~82% oil). In the Eagle Ford, Sanchez recently paid $110,000 per flowing boe of production in McMullen County,” the analysts noted.
The development drilling program is immediately self-funding and expected to generate annual free cash flow of approximately $800 million beginning in 2015 and growing thereafter.
The acquisition will be funded with a combination of cash on hand and borrowings. Devon expects to repay the borrowings with free cash flow and proceeds from the monetization of non-core assets.GeoSouthern 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.
Skadden, Arps, Slate, Meagher & FLom LLP served as legal advisor to Devon. Morgan Stanley and Goldman, Sachs & Co. served as financial advisors to Devon. Simpson Thacher & Bartlett LLP served as legal advisor to GeoSouthern. Jefferies & Company Inc. served as financial advisor to GeoSouthern.
The deal is expected to close in the first quarter of 2014.