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

Part 3

Was Devon Energy’s new Eagle Ford acquisition a good deal?

A bargain

By most measures, it seems that Devon Energy (DVN) was able to secure a bargain price for its acquisition. The company stated that the assets were acquired at 4.0x 2014 EBITDA. Given that Devon paid $6 billion for the acquisition, this implies that in 2014, the acquired properties will generate ~$1.5 billion. The lower the multiple paid, the better the deal.

2013.11.18 - DVN Energy Acquisition Multiple vs PeersEnlarge Graph

Devon notes that its peers (which it identifies as Matador, Rosetta, Sanchez, SM Energy, and Swift) are currently trading at higher multiples than 4.0x. This implies that Devon’s acquisition came at a cheaper price than its peers’ market prices, which is positive for the company.

Company management stated that the transaction is “immediately accretive” from an enterprise value to EBITDA basis (the metric examined above), as well as “just about every other financial metric you can name.” Devon noted that as a result of this transaction in 2014, it expected debt-adjusted cash flow per share to 5% higher, its pretax cash margin per unit of production to be 10% to 15% higher, and earnings per share to be over 20% higher.

Devon also stated the the acquired assets would be “self-funding in year one,” meaning that the company wouldn’t have to put any net cash into the assets upfront. The acquisition is also expected to deliver “significant free cash flow each year thereafter.”

Given these data points, the transaction looks to have been very favorable for Devon, and it’s relatively rare for an acquisition to occur at a price so favorable to the buyer. When the company was asked on the call by a Wall Street analyst “Why do you think you were able to acquire the assets at such a low multiple?” Devon responded, “Obviously, [from] the seller’s motivation you could speculate that they were looking for a liquidity event but from our perspective, we bring a lot to the table in terms of ability to move this project forward and capture the value. They’ve already captured the significant amount of value as well.”  This implies that the seller had a desire for “liquidity”—often meaning cash.

 

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