DVN : NYSE : US$62.77
Devon Energy is an oil and gas E&P company with assets in the U.S. and Canada. The company also has a significant midstream operation. It is headquartered in Oklahoma City, OK.
All amounts in US$ unless otherwise noted.
Energy — Oil and Gas, Exploration and Production
REPORTED GEOSOUTHERN ACQUISITION WOULD BE POSITIVE
We view the possible acquisition of GeoSouthern Energy very positively since it would give DVN added running room to grow its oil volumes from a new position in the Eagle Ford Shale. A deal would bolster the already solid U.S. oil production growth it is getting from its emerging Permian and Miss-Woodford plays. We believe that greater oil growth and a higher mix of oil as a share of its total output are key elements to DVN receiving a higher valuation for its deeply undervalued E&P business.
Acquisition would substantially add to DVN’s U.S. oil production:
U.S. oil currently accounts for 12% of DVN’s total volumes and we project growth of 31% in 2014 and 23% in 2015. This deal would likely increase DVN’s oil production by a significant amount, as GeoSouthern is the 4th largest oil producer in the Eagle Ford. The private company produced 23 MBopd in 2012 – that amount alone would increase DVN’s U.S. oil volumes by over 25%.
GeoSouthern has a very attractive acreage position in the Eagle Ford from being a “first mover” in this play: GeoSouthern has a 50% working interest in 173,000 gross acres in the Black Hawk field; its partner is BHP Billiton. The company also has 68,000 net acres further north in Fayette County.
Eagle Ford is a great fit for DVN’s shale expertise: DVN famously was first to develop on a “mass manufacturing basis” in the Barnett Shale (TX); we believe it could achieve similar results in the Eagle Ford.
DVN’s very strong balance sheet allows for a $6B acquisition: DVN’s net debt/cap ratio (pro forma for the Crosstex deal) is just 18%. With $4.3B of cash on hand, we believe the company is very much able to not only grow this asset quickly, but acquire other assets as well.