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

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Part 4
Must-know points from Devon Energy’s $6 billion acquisition PART 4 OF 6

Devon Energy before and after its GeoSouthern acquisition

Devon Energy’s plans

Devon Energy noted that in conjunction with this acquisition, it would also seek to divest non-core properties. Devon is in the process of marketing certain properties for sale, which is part of how it plans to fund its $6 billion acquisition of GeoSouthern’s Eagle Ford properties. On the conference call surrounding the transaction, the company stated that it plans to sell all of its Canadian conventional assets and other non-core assets in the U.S.

Note that the difference between conventional and unconventional assets refers primarily to the process of extraction. According to an explanation by the Canadian Association of Petroleum Producers, “Conventional gas is typically ‘free gas’ trapped in multiple, relatively small, porous zones in various naturally occurring rock formations such as carbonates, sandstones, and siltstones. However, most of the growth in supply from today’s recoverable gas resources is found in unconventional formations. Unconventional gas reservoirs include tight gas, coal bed methane, gas hydrates, and shale gas. The technological breakthroughs in horizontal drilling and fracturing that have made shale and other unconventional gas supplies commercially viable have revolutionized Canada’s natural gas supply picture.”

Devon Energy before and after its GeoSouthern acquisition

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Devon has stated that it plans to concentrate in five core areas.

  1. Heavy oil in Canada
  2. The Anadarko Basin in the Midcontinent
  3. The Permian Basin in West Texas
  4. The Barnett Shale in East Texas
  5. The Eagle Ford in South Texas

Plus, the company will retain two plays that it classifies as “emerging,” which means they’re in the early stage of proving out and development. The emerging plays include Rockies Oil in Colarado and the Mississippian-Woodford play in Oklahoma. The future Devon will be significantly less natural gas–weighted and more oil-weighted. This is positive for earnings in the current price environment, where oil production generally results in higher margins than natural gas production.

Devon Energy before and after its GeoSouthern acquisition

In line with this shift towards a more oil-weighted portfolio, management commented on the call that for 2014, the company’s capex would concentrate on “high-growth, high-margin core oil assets” with the mix continuing to “shift dramatically towards high margin oil going forward.” The company stated that it expects organic oil production growth of ~20% over the next five years. Meanwhile, the company plans to let gas production fall so that total production grows around the “mid-single digits” over the next few years. However, the company stated that revenues would grow faster given oil’s current price premium to gas.

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