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Devon Energy to Sell All Non-Core US Assets to Linn Energy

Zacks Equity Research

Oil and gas company Devon Energy Corporation (DVN) announced that it has entered into a definitive agreement to sell all of its non-core U.S. assets to Linn Energy (LINE) (LNCO) for $2.3 billion or $1.8 billion after tax. This transaction is expected to close in the third quarter of 2014. The decision to sell its non-core assets is in sync with Devon’s strategy to further develop its core plays.

Portfolio Transformation

Devon’s management had announced in Nov 2013 to transform its existing portfolio of assets and concentrate more on the development of its core operations.

As part of the transformation process Devon entered into an agreement in Nov 2013 to acquire GeoSouthern Energy’s assets in the Eagle Ford Shale for $6 billion in cash. The transaction eventually closed in the first quarter of this year. The acquired assets brought with it an output of 53,000 barrels of oil equivalent ("BOE") per day and 82,000 net acres with at least 1,200 undrilled locations.

The next logical step for Devon was to sell its non-core assets, which included Canadian conventional and non-core U.S. oil and gas assets. Devon sold its Canadian assets to Canadian Natural Resources Ltd. (CNQ) in Apr 2014 for $2.7 billion. With the proposed sale of non-core U.S. assets, the company will generate total proceeds in excess of $5 billion from these divestures. Devon will utilize the net proceeds to lower debts incurred to acquire the Eagle Ford assets.

As a part of the transformation process Devon also merged its midstream assets with Crosstex’s midstream systems to form EnLink Midstream. The assets of Enlink Midstream are spread across premier oil and gas producing regions of the U.S. Devon Energy by virtue of its substantial holding in EnLink Midstream Partners, LP (ENLK), the MLP and EnLink Midstream, LLC (ENLC), the general partner stands to gain from the cash distribution from these partnerships.

Focus on Oil

Devon Energy is currently concentrating on five core liquids-rich plays, namely, the Eagle Ford Shale, the Permian Basin, Canadian Heavy Oil, the Barnett Shale, and the Anadarko Basin. The primary focus of the company is to develop high-margin oil assets.

As a part of this focus, in Apr 2014, Devon Energy decided to invest $1.1 billion in its existing Eagle Ford assets. Devon aims to increase production from the current 53,000 BOE per day to 135,000-145,000 BOE per day in 2017.

Our View

With the transformation of Devon’s portfolio nearly complete, this Zacks Rank #3(Hold) stock has some of the most prolific assets in North America under its belt.

Devon Energy is a consistent performer having surpassed the Zacks Consensus Estimate in the last four quarters with an average beat of 11.31%. The end of the transformation process is expected to further boost its performance.  Devon’s shares also reflect this optimism, gaining 29.2% over the first half of 2014 to close at $79.40 yesterday.

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