Must-know: The timing of Devon Energy’s Eagle Ford acquisition


Jul. 9 2014, Updated 9:00 a.m. ET

Devon Energy Corp. 

Devon Energy Corp. (DVN) is a major exploration and production company operating in the Eagle Ford Shale play in the U.S. The play saw a lot of mergers and acquisitions in 2013. The most prominent of these was Devon Energy’s $6 billion acquisition of assets from GeoSouthern Energy. This transaction implied a valuation of $45,000–$55,000 per undeveloped acre, which set a new price record for acreage in the play.

According to Devon, the acquisition is located in the premier portion of the Eagle Ford play with some of the most attractive economics in the area.

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The company’s current Eagle Ford crude production has an average gravity of ~52 degrees. The net discount from West Texas Intermediate (or WTI) crude has averaged about $7 per barrel since acquiring that acreage earlier this year. This differential is expected to remain volatile in the $6–$12 per barrel range as the production of this type of very light oil continues.

The loosening of the export ban will help narrow this differential significantly even as the company plans to shift towards a more oil-weighted portfolio, to take advantage of the oil’s current price premium to natural gas. The company plans to slow down its natural gas production to achieve this goal. Increasing oil production would mean an increase in its condensate production. With the new law in place, exporting of the condensate will bring down the price differentials.

In line with this objective, DVN plans to spend $1.3 billion in 2014, to drill ~130 net wells or 200 gross wells—200 in DeWittt County, which is operated with BHP with a 50% working interest and 30 in Lavaca County—in the Eagle Ford Shale. While current production from the assets totals 53,000 barrels of oil equivalent per day, 2014 production is forecast to be 70,000–75,000 barrels of oil equivalent per day, or growth of roughly 40%.

As a result of the light of the new export laws, DVN’s increasing focus on its Eagle Ford oil and condensate production is a positive from which the company can derive several benefits.

It’s important to note that Devon Energy is a part of several ETFs including the Energy Select Sector SPDR Fund (XLE), the iShares U.S. Energy ETF (IYE), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and the Vanguard Energy ETF (VDE).


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