Devon Energy Corp. (DVN:US) will buy closely held GeoSouthern Energy Corp.’s Eagle Ford assets for $6 billion in cash, expanding its shale holdings in one of the most prolific oil basins in the U.S.
The acquisition includes production equivalent to 53,000 barrels a day and an estimated 400 million barrels of reserves, Oklahoma City-based Devon said today in a statement. The purchase from The Woodlands, Texas-based GeoSouthern covers 82,000 net acres of drilling leases in the Eagle Ford in Texas.
The deal is the largest acquisition of exploration and production assets announced this year, according to data compiled by Bloomberg. Devon, whose 15 percent stock gain in the year through Nov. 18 trailed a peer group’s return of 27 percent, had been criticized for not having enough high-growth U.S. oil projects. The company narrowed its focus to onshore North America after selling assets in the Gulf of Mexico and Brazil in recent years.
“They definitely lagged oil growth in the lower 48” states, Fadel Gheit, an analyst with Oppenheimer & Co. in New York, said in a phone interview today. “They went for the Eagle Ford, which is the priciest part of the whole lower 48, and they paid a hefty price.”
Still, investors liked the transaction as it adds a missing piece, said Gheit, who has a rating equivalent to a buy on Devon. The stock was down 0.3 percent at $62.58 at 1:30 p.m. in New York, after rising as much as 4.5 percent earlier.
The deal is expected to close in the first quarter, Devon said. The company plans to use a combination of cash and borrowings to fund the purchase. Devon also plans to sell assets with the equivalent of about 150,000 barrels of oil a day of production, according to a slide presentation today.
Devon’s fourth-quarter output would be about 31 percent oil if Eagle Ford assets were included and assets for sale were excluded, compared with Devon’s current portfolio that’s comprised of about 25 percent oil, the company said.
In February 2012, Blackstone Group LP (BX:US) and GeoSouthern closed on a $1 billion credit facility to help fund GeoSouthern’s drilling program in the Eagle Ford. GeoSouthern will continue to operate other assets in areas such as the Texas Gulf Coast region, according to today’s statement, while Blackstone plans to exit its stake in the company through the transaction.
Production from the Eagle Ford may rise to as much as 1.645 million barrels of oil a day in 2022, almost triple the output from 2012, according to a report from Dallas-based energy consultant Turner, Mason & Co.
Devon’s total output averaged the equivalent of about 691,000 barrels of oil a day in the third quarter, up 1.9 percent from the year-earlier period, the company said Nov. 6. The acquired assets are expected to grow at a compound annual rate of 25 percent in the next several years, Devon said, and reach a peak of about 140,000 barrels of oil equivalent a day.
“Devon will be able to enter the position in full development mode,” Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets, wrote today in a note to clients.
Adjusted for production, Devon paid about $30,000 to $35,000 an acre, slightly more than what Marathon Oil Corp. (MRO:US) paid for Eagle Ford acreage last year, Hanold wrote. Most of the reserves are proved, the acreage is contiguous, and no additional drilling is needed to meet lease terms, justifying a higher price, he wrote.
The company is looking at ways to boost shareholder value after being slower than some producers to switch to oil, David Neuhauser, a managing director at Livermore Partners Inc. in Northbrook, Illinois, said today in a phone interview. Neuhauser, whose firm owns Devon shares, said the company’s stock may rise to $75 or $80 in the next 24 months if oil prices stay strong.
“The market’s embracing this deal because they feel it fits the portfolio extremely well and it’s also going to add long-term value to the company,” he said.
The deal doesn’t signal a rebound in big U.S. oil and gas takeovers, said Ralph Eads, vice chairman of Jefferies LLC, which advised GeoSouthern on the transaction.
“There will be lots of asset deals” Eads said. “ I don’t think there is going to be a lot of corporate M&A. I don’t see the calalyst for it.”
The GeoSouthern transaction marks the second major deal in a month for Devon. The company said Oct. 21 it and Crosstex Energy Inc. agreed to form a business that will acquire all of Crosstex’s shares and combine the two companies’ fuel pipeline and processing facilities.
The entity will consist of a master-limited partnership and a general partner, both publicly traded. Devon, which will control both of the entities and be the new company’s largest customer, has said it’s contributing assets valued at about $4.8 billion.
Morgan Stanley and Goldman Sachs Group Inc. advised Devon on today’s deal and Jefferies was GeoSouthern’s financial adviser. Skadden, Arps, Slate, Meagher & Flom LLP provided legal advice to Devon and Simpson Thacher & Bartlett LLP advised GeoSouthern.
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