Devon Energy’s recent acquisitions
On December 7, 2015, in a bid to expand its oil-rich asset base, Devon Energy (DVN) announced acquisitions of oil-focused leaseholds in the STACK and Powder River Basin plays.
DVN’s STACK acquisition
DVN will purchase 80,000 net surface areas in the Anadarko Basin’s STACK play from Felix Energy, a privately held company, for $1.9 billion. Felix Energy is a portfolio company of EnCap Investments, a private equity firm focused on energy. The production associated with these properties is 9,000 barrels of oil equivalent per day (or Boe/d). This brings Devon’s daily production in the STACK play, which includes the Cana-Woodford development, to ~80,000 Boe/d and total net surface acres to 430,000 acres.
In a related transaction, Devon’s midstream arm, EnLink Midstream Partners (ENLK), agreed to acquire Tall Oak Midstream, another portfolio company of EnCap, for $1.6 billion. Tall Oak’s gathering and processing assets service the core area of the STACK play.
DVN’s Powder River Basin acquisition
DVN will also purchase 53,000 net acres in the Powder River Basin for $600 million. The production associated with these properties is 7,000 Boe/d, ~85% of which is oil. This brings Devon’s daily production in the Powder River Basin to ~30,000 Boe/d and total net acres to 470,000 acres.
Key operators in the STACK basin include Newfield Exploration (NFX). Key operators in the Powder River Basin include Chesapeake Energy (CHK) and ONEOK (OKE). All these companies make up ~3% of the Energy Select Sector SPDR ETF (XLE).
The two transactions will cost Devon $2.5 billion. Devon plans to fund these transactions with a combination of equity and debt. In reference to equity, $1.4 billion of Devon equity will be issued. The remaining $1.2 billion will be funded through cash on hand and borrowings.
Will these acquisitions pay off?
These acquisitions make Devon Energy more leveraged to crude oil. While this could pay off if prices recover, bear in mind that DVN’s capital requirements would also increase. This could become a concern if low prices continue to persist.
Next, we will read about how Devon Energy’s production mix and realized prices have evolved.