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Why did LINN Energy acquire oil and gas assets from Devon Energy?

Part 2
Why did LINN Energy acquire oil and gas assets from Devon Energy? (Part 2 of 4)

Why the recent sale fits into Devon’s long-term business strategy

Business overview of Devon Energy

Devon Energy Corporation (DVN) is an independent energy company engaged in the exploration, development, and production of oil, natural gas, and natural gas liquids (or NGLs). As of December 31, 2013, the company had 2.9 billion barrels of oil equivalent of proved developed and undeveloped reserves. In 2013, its combined production was 693 thousand barrels of oil equivalent per day. It also operates approximately 24,000 wells. The market capitalization of DVN as of July1, 2014 was $32.3 billion and the company had an enterprise value of $45.9 billion. Earnings before interest, taxes, depreciation, and amortization (or EBITDA) over the last 12 months totaled $8.1 billion.

DVN Asset mapEnlarge Graph

DVN’s restructuring strategy

DVN CapexEnlarge Graph

With the recent asset sale-off, Devon Energy (DVN) is now close to wrapping up its asset restructuring program it had been undertaking since late-2009. The company now clearly focuses on becoming a predominantly crude oil drilling company rather than holding a balanced portfolio of oil and gas.

DVN OIl productionEnlarge Graph

By focusing on oil production growth, it expects to improve operating margins and cash flows. In 2012 and 2013, the company recorded loss from continuing operations as a result of huge asset impairment charges, primarily on account of the asset sales. In addition, to upgrade its asset base on more liquid-rich areas, DVN acquired the Eagle Ford Shale in February, 2014. It announced the acquisition of the Cana-Woodford Shale acreage in May, 2014. It also created a new midstream operator with a joint venture with Crosstex Energy and EnLink Midstream Partners (or ELNK) in March, 2014. The other part of the restructuring strategy was the initiation of an asset divestiture program.

Divestiture of offshore assets

DVN DivestitureEnlarge Graph

Earlier, in 4Q09, DVN announced plans to divest the offshore assets. By the end of 2012, it divested all of its U.S. offshore and international assets.

Canadian asset divestiture

On April 1, 2014, DVN sold the majority of its Canadian oil and gas assets to Canadian Natural Resources Ltd. for approximately $2.7 billion. This divestiture included approximately 170 million barrels of oil equivalent of proved reserves. This included 357 million cubic feet per day of natural gas of production. DVN expects to repay borrowings used to fund a portion of the Eagle Ford Shale acquisition in 2Q14.

Value of the currently sold-off assets

It is estimated that production from the assets sold by DVN to LINE is currently 275 million cubic feet of gas equivalent per day. Approximately 80% of the production is natural gas. At December 31, 2013, proved reserves associated with these properties amounted to 1.242 trillion cubic feet of gas equivalent. In 2013, EBITDA from these assets totaled $350 million.

Why will DVN gain from the sale?

DVN ong Term DebtEnlarge Graph

Apart from achieving the operational objectives, the sale would also help DVN reduce its leverage. Upon completion of this transaction, DVN would reduce its net debt by more than $4 billion in 2014. By the end of March, 2014, its long-term debt increased to $11.7 billion from $7.9 billion by the end of December, 2013. The sale is expected to improve its credit metrics.

Going by the results of the recent divestitures, it’s expected that the sale would significantly boost DVN’s bottom line. The sale of Canadian and U.S. non-core properties over the past few months has generated in excess of $5 billion of proceeds at nearly ~7x its 2013 EBITDA. The new sale-off would record a EBITDA multiple of 6.5x. In comparison, DVN is currently trading at 5.6x its EV (or enterprise value)/EBITDA multiple.

The acquisition of oil and gas properties of Devon Energy Corporation (DVN) by LINN Energy LLC (LINE) is expected to be positive for both the companies as it strengthens the long-term business strategies of the companies. LINE is a component of the iShares Select Dividend ETF (CVY). DVN is component of the Energy Select Sector SPDR (XLE) and the Vanguard Energy ETF (VDE). To learn more about the growth prospects of LINE’s acquired assets, continue reading the next section in this series.

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