Takeaways from Devon Energy’s GeoSouthern Eagle Ford acquisition

Ingrid Pan, CFA

Must-know points from Devon Energy’s $6 billion acquisition (Part 6 of 6)

(Continued from Part 5)

What investors need to know about the acquisition

Here are the most important takeaways from Devon’s (DVN) acquisition of GeoSouthern’s Eagle Ford properties.

Transaction summary

Devon plans to purchase GeoSouthern’s Eagle Ford assets for $6 billion in cash. Current production is 53,000 barrels of oil equivalent per day, composed of 56% oil, 20% NGLs, and 24% natural gas. There are 1,200 identified drilling locations on 82,000 of net acreage. The transaction is expected to close in 1Q14.

Asset overview

Devon states that the assets are located in the premier part of the play with the best initial production rates. The company notes that the average of its wells drilled since 2011 has a normalized 30-day initial production rate of over 1,000 barrels of oil equivalent per day, which leads the pack of its Eagle Ford peers. The company asserts that its acreage is located in one of the most prolific areas of the Eagle Ford.

Valuation

The company states that it has purchased the assets at 4.0x 2014 EBITDA and 2.5x 2015 EBITDA, both of which are lower multiples than where Devon itself and peer companies trade, which implies that this was a good deal for the buyer. Plus, Devon states that the purchase is accretive by almost every financial measure.

Growth plan

Devon plans to grow production ~40% in 2014, and at a compounded annual growth rate of ~25% through 2017. The company plans to spend ~$1.3 billion in the area in 2014, which it notes will be completely self-funded by proceeds from hydrocarbons produced there. Also, through 2017, the assets are expected to generate ~$2.5 billion of free cash flow. Note that the acquisition has a relatively short reserve life, with current identified drilling locations at 1,200, and a plan to drill ~230 wells a year.

Before and after

In conjunction with the announcement of the acquisition, Devon also stated that it plans to divest certain non-core assets with the proceeds used to fund part of the consideration of the purchase. The new Devon, with the addition of the Eagle Ford properties and with the exclusion of the assets to be sold, will have significantly more oil production and will continue to shift more towards oil and less towards natural gas.

Other key takeaways

That Devon chose to spend such a large amount of money in the Eagle Ford also signals the company’s confidence in the play. It’s an affirmation that the Eagle Ford is currently one of the U.S.’s premier areas for oil and gas production. It also underscores the message that companies are continuing to shift portfolios away from natural gas (which continues to trade cheaply) towards oil when afforded the opportunity. Lastly, an acquisition on such a scale and weighted towards oil may signal that Devon feels relatively bullish about the global oil price environment over the next few years.

Altogether, this looks to have been a positive transaction for the company, and the stock price responded well. Devon stock rose nearly $3 per share on the day the transaction was rumored to occur, closing on November 19, 2013, at $62.77 per share, compared to $59.79 per share the day prior.

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