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Must-know points from Devon Energy’s $6 billion acquisition

Must-know points from Devon Energy’s $6 billion acquisition (Part 1 of 6)

Devon Energy agrees to acquire GeoSouthern’s Eagle Ford properties

Devon Energy agrees to acquire GeoSouthern properties in the Eagle Ford

On November 20, Devon Energy (DVN) announced that it agreed to acquire the Eagle Ford (South Texas) assets of private oil- and gas-producing company GeoSouthern for total consideration of $6 billion in cash (no equity issued). In this transaction, Devon is acquiring assets that currently produce 53,000 barrels of oil equivalent per day (56% light oil, 20% NGLs, or natural gas liquids, and 24% natural gas). The acquisition also comes with 82,000 net acres and at least 1,200 undrilled locations (potential locations for future wells), located in DeWitt and Lavaca counties. The assets are under a joint development agreement with BHP Billiton (BHP), where BHP and Devon will each have a 50% working interest in the properties. This essentially means the two parties will split the cost of production and revenues from hydrocarbon sales will be split evenly between the two parties.

Devon Energy agrees to acquire GeoSouthern’s Eagle Ford propertiesEnlarge Graph

The company noted that the properties were acquired at 4.0x 2014 EBITDA and 2.5x 2015 EBITDA. The consideration will be paid with cash on hand and the proceeds of asset sales, with the deal expected to close in the first quarter of 2014.

In conjunction with the deal, Devon has hedged 100% of the estimated oil production for 2014 with downside protection at $90 per barrel, and has started hedging some of its estimated production for 2015.

The market responded positively to the deal, with Devon’s stock jumping from $59.79 per share on November 18 to close at $62.77 per share as rumors of the deal began circulating the day before the announcement.

The following sections in this series discuss in detail Devon’s purchase of GeoSouthern’s Eagle Ford assets.

Note that Devon and other companies located in the Eagle Ford are part of energy ETFs such as the Energy Select Sector SPDR (XLE), the Vanguard Energy ETF (VDE), the iShares US Energy ETF (IYE), and the Oil & Gas Explroation & Production SPDR (XOP).

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