Devon Energy Corp. (NYSE: DVN) has agreed to acquire 80,000 net surface acres, with up to 10 prospective zones, in the Anadarko Basin STACK play from privately held Felix Energy, a portfolio company of EnCap Investments, for $1.9 billion. In a separate transaction, Devon has also agreed to acquire 253,000 net acres in the Powder River Basin for $600 million. The transactions will be funded with $1.35 billion of Devon equity issued to sellers and $1.15 billion of cash on hand and borrowings.
In a related transaction, EnLink Midstream agreed to acquire subsidiaries of Tall Oak Midstream, a portfolio company for EnCap Flatrock Midstream, for $1.55 billion. Tall Oak’s gathering and processing assets are located in the core area of the STACK play and the vast majority of the Felix acreage position is dedicated to this midstream infrastructure.
The 80,000 net surface acres being acquired in the STACK play are located in Blaine, Canadian, and Kingfisher counties in Oklahoma, immediately northeast of Devon’s legacy STACK position. Situated in the over-pressured oil window of the play, these properties include low-risk development targets in up to 10 intervals including multiple landing zones in the Meramec, Osage, and Woodford formations. Given the potential for numerous landing zones and tighter infill spacing opportunities across this acreage, Devon has identified 1,400 risked locations, with an unrisked inventory of more than 3,000 locations.
The acquired properties include production of approximately 9,000 oil-equivalent barrels (boe) per day and estimated risked resource of approximately 400 million boe. Based on an estimated value of the existing daily production in excess of $300 million, Devon estimates it is paying approximately $20,000 per surface acre or approximately $4 per boe of risked resource.
Upon closing of the Felix assets in early 2016, Devon’s daily production in the STACK play, which includes the Cana-Woodford development, will increase to an industry-leading total of nearly 80,000 boe per day. The company now has exposure to 430,000 net surface acres in the STACK with 5,300 risked locations.
The acquired Powder River Basin acreage is located to the south of Devon’s legacy position in Wyoming and includes production of 7,000 boe per day, with 85% oil. This leasehold resides in the core of the Powder River oil fairway and is most prospective for the Parkman, Turner, and Teapot formations. The contiguous acreage allows for extended-reach horizontal drilling and Devon has conservatively identified 500 development-ready locations with potential for as many as 2,700 unrisked locations as appraisal drilling further derisks multiple formations in the oil fairway.
After deducting the value of current production at $30,000 per flowing barrel and $100 million of midstream infrastructure, Devon secured the undeveloped leasehold at roughly $1,100 per acre.
Upon closing the transaction, Devon’s daily production from its Rockies business unit will increase to more than 30,000 boe per day, and its Powder River Basin leasehold position will more than double to 470,000 net acres with stacked-pay potential across multiple oil-prone formations. The size of the opportunity is significant with several billion barrels of unrisked resource across the basin.
The acquisitions will initially be funded with a combination of equity and cash. Devon will issue shares to sellers valued at $1.35 billion and intends to fund the balance of the acquisitions through cash on hand and borrowings.
The company is in the process of marketing its Access Pipeline in Canada and is also planning to monetize various non-core upstream assets across its portfolio. Devon has identified 50,000 to 80,000 boe per day of production from non-core assets to divest throughout 2016. The company expects midstream and upstream divestitures to generate proceeds of $2 billion to $3 billion, and plans to utilize sales proceeds to strengthen its financial position.
The financial advisor to Devon for the Felix transaction was Morgan Stanley & Co. LLC. The financial advisor to Felix was Tudor, Pickering, Holt & Co.